This week, we’re proud to feature the first of a two part series of guest blogs from our new partner, GoSmallBiz.
You’ve probably noticed that some businesses have “Inc.” or “LLC” at the end of their name. Do you know what that means? Your entity type is one of the biggest decisions you’ll make about your business—whether you know you’ve made the decision or not! It affects everything from how the business is taxed to whether you are personally liable for the business’s debts to whether you are ever able to sell or transfer the business.
Let’s take a look at the most common business entity types and what they mean:
If you start a business by yourself and don’t select another business structure, then: Congratulations! You just started a sole proprietorship. This is a default entity type, and doesn’t have any requirements to start it or maintain it over the years. Any profits you make in the business are taxed on your personal tax return. But while the sole proprietorship is easy in some ways, it has limitations, too. Most importantly, you have unlimited liability: you are personally responsible for any and all of the business’s debts and obligations, and that puts all your personal assets at risk. And you can’t sell or transfer a sole proprietorship; if you stop running it for any reason, it ceases to exist.
A general partnership is the other default business structure, this time when you start a business with multiple people. It has a lot of the same strengths and weaknesses as the sole proprietorship. It requires no paperwork and taxes are paid on your personal tax returns. But you still have unlimited liability, and general partnerships can be very unstable. If just one partner leaves the business, then the general partnership is legally dissolved.
Limited Liability Company (LLC)
The LLC is one of the most flexible entity types. There can be one or many owners (and ownership is transferrable), and on the tax front, you get to choose whether the business will be taxed like a sole proprietorship or general partnership or like a corporation. And most importantly, like the name says, you have limited liability. That means that as long as you follow necessary procedures, your personal assets are protected; only the business’s assets are at risk. To form an LLC, you have to file paperwork with your state and pay an annual fee to maintain the entity.
The corporation is another entity type with limited liability for its owners, and is especially popular with larger companies. The corporation can issue stock to raise money, and ownership is defined by who holds the company’s shares, making it easy to transfer ownership of the business. However, corporations have to fulfill formation and maintenance requirements such as mandatory meetings, corporate minutes, notification and documentation, and more. Corporations also have double taxation: the corporation pays the corporate tax rate on its profits, and when shareholders receive part of those profits as dividends then they pay a second tax on their personal returns.
Not only do LLCs and Corporations offer protection for you as the business owner, but they are also credibility boosters for your customers. Choosing the right business entity type can make all the difference!
To learn more about business entities and how you can incorporate your business, visit http://psfcu.gosmallbiz.com/additional-services/incorporation-services/.