Business Formation

A corporation is a business that is owned by shareholders who share in profits and losses the business’ operations.  A corporation is a legal entity with limited liability to its owners, and can live continually through ownership transfer by sale or gift.

A Limited Liability Company, or LLC, is a business structure that has the limited liability of a corporation combined with the pass-though taxation of a partnership or sole proprietorship.

An S Corporation provides for the same limited liability of a corporate shareholder as a regular corporation, but allows for the paying of income taxes as if it were a partnership or sole proprietor.

A Partnership is a business owned by two or more people.  Partnerships do not have to file papers, the arrangement begins when the business is started with another person.  Many partners will have a written partnership agreement.

Doing Business As (DBA) is a registration that allows a business to operate under a name other than its legal name.  A corporation, LLC, or personal name of the business owner of a sole proprietorship or partnership must file a DBA to do business under another name.

Pros and Cons of Different Business Entities

Which Business Formation Would Be The Best For You?

S Corporation

Pros

• S Corps have no “double taxation” with profits and losses passing through to the owner’s personal income tax.
• On selling an S Corporation, there may be reduced taxable gains.
• The expenses and losses, particularly in start-up of your business, can be offset against your personal income whereas in a regular corporation, it cannot.
• S Corps have liability protection although it is not complete protection.

Cons

• S Corporation can issue only one class of stock which can limit control and stock value.
• Venture capitalists will not want to invest in a company that has pass through taxation or a limit of 75 shareholders.
• S Corps must file a tax return every year.
• Status is still a corporation so you must have regular meetings and maintain company minutes.

C Corporation

Pros

• The owners (shareholders) have protection from legal liability.
• The ability to issue stock is a strong selling point for investors.
• The corporate business form has a power structure with directors, officers, and shareholders with defined roles and responsibilities.

Cons

• Incorporation can be expensive and time-consuming with filing fees and required documentation.
• Corporate laws must be followed, i.e., meetings of directors, records, financial independence.
• There may be potential tax liability as profits may be “double” taxed.

LLC

Pros

• An LLC allows for a more flexible management structure.
• The owners and shareholders pare protects from personal liability.
• An LLC has tax options, it can choose to be taxed as sole proprietorship, partnerhsip, S corp, or corporation
• There are less compliance regulations.
• Investors have little or no say in the daily operation as long as it is stated in operating agreement.

Cons

• LLC’s have “pass-through” taxation which means that any profits and losses are reported on each owner’s (or shareholder’s) individual tax returns whether dividends were paid or not.
• Lack of strict corporate structure and pass-through taxation may be perceived as a negative by investors.
• Many states require LLCs to pay a “capital values tax” or franchise tax.
• Less structure in business government may mean that a detailed operating agreement needs to be in place and could require additional costs.

Partnership

Pros

• Partnerships allow a shared cost of start-up.
• Partnerships share responsibilities and work.
• Partnerships share risks and expenses.
• Each partner may contribute complementary skills and contacts that result in greater financial success than if they were separate.
• There is mutual support and motivation.

Cons

• Partners are jointly and individually liable for all debts, not just half of them.
• Profits are shared.
• There is no “total” control over the business as decisions are shared, and this may lead to disagreements.
• Friendships may not survive partnerships.

DBA

Pros

• Doing Business As (DBA’s) are easy and relatively inexpensive to form.
• DBA’s are easy to operate.
• There is no double taxation of income
• DBA’s are allowed to operate in all jurisdictions.
• DBA’s provide the ability to have multiple businesses under the same owner.

Cons

• A DBA does not provide for legal protections for the business owner and owners are liable for all legal problems.

Sole Proprietorship

Pros

• A sole proprietorship is easy to form since it requires only a few forms and needs only be filed with the local city or county clerk’s office.
• You have total control of the money.
• You make all the business decisions.
• You are the management and can respond quickly to daily issues.
• There is less government control and taxation.
• You do not have to file for the business or have to prepare a balance sheet.

Cons

• There is unlimited liability as you are responsible for all business debts and obligations.
• An illness, death, or incapacity of the owner can result in the termination of the business.
• It is more difficult to raise financing due to fewer assets.
• A sole proprietorship may seem less professional than other business entities.