Choosing the Right Business Entity, Sole Proprietorship vs. LLC vs. Corporation

While there are many different types of business entities to choose from, three of the most popular are sole proprietorships, corporations, and limited liability companies (LLCs). Finding the right business structure can significantly impact everything from your tax bill to your personal liability on behalf of the company.

Sole Proprietorships

The simplest option available for starting a business is operating as a sole proprietorship. You can generally get started without any paperwork or other formalities unless you need a specific business license or want to operate with a fictitious name. As the name suggests, you are the sole owner of the company. There are no options for selling stock or bringing in partners.

In addition to the simplicity of setting up a sole proprietorship, the other major benefit of this entity is the advantage of only being taxed once. You will simply pay taxes on your profits as part of your personal tax return.

However, there is a major drawback to being aware of—unlike most other business types, sole proprietorships do not provide any personal liability protection. That means you could be sued on a personal level for obligations related to the business.

Corporations

Corporations are a type of business structure used to operate larger companies. They can have multiple shareholders and investors and be publicly traded on the stock market. The process of setting up a corporation is much more complex than a sole proprietorship.

There are two different subcategories to consider: S-corporations and C-corporations. C-corporations have the downside of being taxed twice—at the corporate and individual levels. S-corporations have a unique downside: they can have at most 100 shareholders.

LLCs

LLCs offer a lot of flexibility for small and medium-sized companies. There is no need for a board of directors, but there is also no limit on the number of owners allowed. LLCs offer protection from personal liability for business obligations, a tremendous advantage of sole proprietorships. You also get the flexibility to determine if you will be taxed once or twice depending on the type of LLC you create.

However, LLCs generally have ongoing filing requirements and cannot go public. They are also not recognized in every country, which can lead to tax complications if you do business overseas.

Let One Oak Legal Help

Choosing the appropriate business entity is an important early decision that can have a long-lasting impact on your company. Whether you choose a sole proprietorship, LLC, or corporation, it is vital that you first discuss your options with skilled legal counsel. Working through this decision with the attorneys of One Oak Legal can ensure you make the choice that will be best for your business in the long run. Contact us as soon as possible for a private consultation.