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Business Entities - Which Works Best for You?

Starting a business? Whether you are just getting started or have outgrown your original tax structure, there are many business entities to choose from, with pros and cons for each one. Which type is best for your business depends on what products or services you offer, how much money you earn, whether or not you own the business alone, how many employees you have, what risk or liability you are willing to absorb, and other factors. Here are some common business entity choices and a few of the advantages and disadvantages of each.

Types of Business Entities

Sole Proprietorship

A default business ownership for an individual, where the individual makes all profit gain for themselves and is responsible for all debts. The business is categorized as the same entity as the individual on their taxes.

  • Advantages: Very easy to set up, easy to file taxes, single taxation, full entitlement to profits, and controlled by the owner without contest. 
  • Disadvantages: Sole and complete liability for personal assets and debts, the sole owner provides equity and must pay self-employment taxes.

Choice of a general partnership or limited liability partnership. The proportion of profits earned is shared based on the personal investment of funds by each partner. Regular partners have some say in the running of the company while limited partners who invest less do not, especially after payout.

  • Advantages: Easy to create, more capital and diversity of skill sets available with more partners, no creation fees, single taxation, and partners report losses on their personal taxes. 
  • Disadvantages: Partners are all personally liable for debts, and some partnership business income can be eligible for self-employment taxes.

Investors receive shares of stock as a form of ownership. The business is a separate entity, which pays multiple types of taxes. 

  • Advantages: Owners/shareholders’ only liability is the amount they have invested, a shareholder can sell their shares to a third party, the corporation has a possibility to build up a great deal of capital.
  • Disadvantages: Expensive to maintain, lots of paperwork which always requires legal staff, double taxes, unless it’s an “S” corporation, in which case the entity doesn’t pay income tax but also requires the owners to report income on their personal taxes.
Limited Liability Company

A popular choice for a reason, many small businesses opt for this choice because it combines aspects of partnerships and corporations.

  • Advantages: Owners only liable for their own investments while retaining control over business decisions, owners can receive income directly, can be run by managers, unlimited investors possible, owners can choose how the LLC will be taxed
  • Disadvantages: More expensive to create and maintain than sole proprietorship or partnership, annual government fees.

Free Guide: How to Choose Your Business Entity

If you need help deciding which entity or combination of entities is best, or when it comes time to set one up, Myrick CPA can help. Regardless of your goals and ownership model, you’ll want tax experts to guide you in choosing what works best for you. Get in touch with our professionals today.