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The Montana Estate Lawyer

Friday, August 17, 2018

Which Business Entity Makes The Most Sense For Your Business?

We always advise you to consult with a tax advisor, certified public accountant, or business attorney before making the decision to form any business entity, but this article may give you some insight on what options are available.

Factors in making this decision may include the size of the business, location of business operations, and number of owners. The most commonly used types of business entities are sole proprietorships, partnerships, limited liability companies, and corporations. In this article we’ll give a brief description and the advantages and disadvantages of each entity.

sole proprietorship

A sole proprietorship is a business that is owned by an individual. Sole proprietorships are the most frequently used business structures, because they require little to no legal help to form.

ADVANTAGES

DISADVANTAGES

  • Owner has complete control of operations and decisions
  • Can be any type of business
  • Taxed at the individual rate for income
  • Easy and inexpensive to form
  • Owner is personally liable for all financial obligations and debts of the business
  • Income taxes are not withheld from business income requiring quarterly tax payments

 

 partnership

A Partnership is a business that is owned by two or more people. Partnerships can be limited or general. Limited partners contribute funds to the business, but do not take part in day-to-day operations; they are only liable for their portion of contribution, once those funds are paid they accrue no additional liability. General partners contribute funds to the business and take part in day-to-day operations; they are liable for partnership obligations, and creditors can pursue all general partners or target specific partners for liabilities.

ADVANTAGES

DISADVANTAGES

  • Richer source of capital because of multiple owners
  • No double taxation
  • Minimal tax filings
  • Unlimited personal liability for obligations of the partnership
  • Partner’s share is subject to self-employment tax that is generated on all earnings of the business

 

 Corporation

Corporations are owned by shareholders (stockholders) who share in profits and losses. Corporations must meet certain legal requirements to be recognized as having legal existence, as an entity separate and distinct from its owners. There are two types of Corporations. Subchapter C-Corporations and Subchapter S-Corporations. The primary difference between the two is the way they are taxed. It requires a significant amount of legal preparation to form a corporation and maintain corporate records that must be filed with the State.

ADVANTAGES

DISADVANTAGES

  • Shareholders are not liable for any debts, the only risk is equity
  • Some corporations can elect S-Corporation status, so that profits pass-through to the owners
  • Corporations can deduct the cost of benefits provided to employees and officers
  • Formation requires more time and money than any other business structure
  • Corporate profits and capital gains are taxed at the corporate level and again at the individual level when distributed to shareholders
  • The Government monitors corporations which results in more paperwork

 

 Limited liability Company (llc)

A limited liability company (LLC) is a business entity owned by members or managers authorized to operate under state law. Since the Tax Reform Act of 1986 business owner have been influenced to opt for LLC formation to avoid double taxation, as seen in C-Corporations. Business owners have also avoided this double taxation by filing for S-Corporation status with the IRS. Business owners also opt for LLC formation to avoid personal liability, as seen in general partnerships and sole proprietorships.

ADVANTAGES

DISADVANTAGES

  • Flexibility to elect how they are taxed
  • Limited liability
  • Members do not have to be individuals, the can be trusts, corporations, other LLCs, etc.
  • Profits may be subject to self-employment taxes
  • LLCs are not able to operate in all states

 

 To weigh all your options consult with a tax advisor or business attorney>

 LaTonya


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