Creating a small business or changing the business legal structure is a huge task. Are you trying to decide between an LLC, Sole Proprietor, S-Corp, and INC?
In the United States, a newly formed company has the option of several legal structures to operate the business. Choosing between different options can be tiring and frustrating. But choosing the right business type is essential to your business’s success, your bank account, and it may legally protect you in the future.
Knowing the differences between the entity types and how these types operate can help first-time entrepreneurs when choosing the right entity type for their business. There are several factors that you should take into consideration when making the right decision as:
• Taxation
• Liability protection
• Type of industry you are in
• Ownership
• Management structure
• Size of your business
• Compliance requirements
Choosing an appropriate business legal structure is one of the prime responsibilities of the entrepreneur. It means they should objectively analyze all the aspects of different business entity types and make an informed decision in the best of the business. We recommend you do your research; however, before you register your business you must seek the experienced guidance of an accountant and business attorney.
In this article, you will read the differences between a Sole Propriertor, LLC, S-Corp, and INC to make an informed decision about which entity type to choose.
Sole Proprietor
The sole proprietorship is one of the simplest & cost-effective business structures because there is no separation between the owner and the business. As a sole proprietorship, you are doing business under your name. In Sole proprietor, no legal documents are required, and you do not have to file a separate tax return. Your business income & expenses are reported on the personal tax return. You will pay the same tax rate as what you pay on taxes from an employer. You only need to pay a self-employment tax on the income from your business, additionally. One of the main differences between a sole proprietor and other business entities is that there is no protection against personal liability. The owner will have to face losses in the business.
LLCs – Limited Liability Companies
An LLC is a type of legal entity used in forming a business separate from its members or shareholders. LLCs are generally easy to manage and have few paperwork requirements. Under an LLC, the business and business owners are considered two separate entities. LLCs offer protection from business liabilities and debts to the owners. It means that the owners of LLCs are not personally responsible for business debts & liabilities. LLCs have tax benefits since the company profits & losses are reported on the owners’ tax return. The owners do not have to file for a corporate tax return. The necessary taxes are paid at the individual level.
S-Corp
An S corporation is a type of corporation that meets specific guidelines by the Internal Revenue Service (IRS). It’s the most expensive business structure to form among other business entities. S-Corp is a type of corporation that protects its shareholders from personal liability in case of any misconduct. S corporations enjoy more tax benefits than LLCs. Unlike a sole proprietor or an LLC, S Corps does not pay taxes on all the revenue of the business. The S-Corp shareholders are only required to pay income tax on the reasonable salary they pay to themselves. Unlike LLCs, which allows any number of members to participate in the business, S corporations cannot have more than 100 members.
Inc.
Inc. is the abbreviated form of Incorporation. Incorporation is a separate legal entity from the person or people forming it. Directors and officers purchase shares in the business and have responsibility for its operation. The corporation itself is responsible for its debts & liabilities. Unlike LLC and Proprietorship, corporations have the advantage of allowing profits to remain with the corporation and paying them out as dividends to shareholders. Corporations can also sell shares to raise capital and expand the business. But creating a corporation requires more work, documentation, meeting many guidelines, adopting bylaws, electing a board of directors, having annual meetings, and create financial statements.
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