When forming a new business, one of your first and most important decisions is what business entity, or legal structure, to choose for your business. There are several to choose from, each with its own requirements and its own benefits and restrictions. Scott Boyar, CPA, a tax advisor for one of the top CPA firms in Charlotte NC, offers this brief guide to making that critical decision.
Types of Business Entities
When choosing between the different business entities, there are three main factors to consider:
- Liability - To what extent are you personally protected from legal liability for actions of the business or activities that occur on business property or in the company's service? If the business gets sued, how much of your personal property, finances, and, especially, freedom are at stake?
- Record-keeping - How much time and money will it cost you to manage all the paperwork associated with forming and, then, running a business?
- Taxation - How can you minimize your business's tax obligations without overly restricting your ability to run your business the way you want?
As you read through the descriptions of different business entity types below, keep these three factors in mind. Look for the structure that best supports your particular circumstances and needs.
The most commonly formed business entity, a sole proprietorship, generally has just one owner who maintains total managerial control over the business and reaps all the business's profits. This sole proprietor, however, is also solely responsible for all the financial responsibilities of the company.
A partnership is a business entity involving two or more people who consent to share in a business's profits and losses. Partners may or may not be equal and may or may not share equally in the business's responsibilities and rewards. As long as all parties agree in the partnership agreement, a partnership can be arranged in almost any way. One key benefit of this structure is that tax benefits and burdens are not passed through to the owners. That means partners do not need to pay personal income taxes on their profits, but they also can't write off business losses on their own taxes. However, one disadvantage of this structure is that all partners have legal responsibility personally for the business's financial obligations.
A corporation is an entirely separate legal entity from the individuals who own it. Therefore, the owners of a corporation are shielded from personal liability for the business's financial obligations. Instead, the corporation is taxed and held legally liable for its actions, just like it was a person. A corporation is also allowed to earn a profit. The disadvantages of forming a corporation are the cost and record-keeping, both of which are considerable. You can avoid double taxation by forming an S corporation instead of the standard C corporation, but the cost and record-keeping are still significant.
Limited Liability Company (LLC)
An LLC is a hybrid of a partnership and a corporation. It costs less to set up and maintain and has less record-keeping requirements than a corporation. Still, it offers the same or similar legal protections to its owners from legal liability for the business's actions. As a partnership, business profits and losses can pass through to the owners without them being personally responsible for the company's tax burdens.
Selecting Your Business Entity
Besides liability, record-keeping, and taxation, other considerations to make in choosing the right business entity for you and your business are the amount of flexibility you want over the business's management and operation and your estimations of your future business needs. Business structures like corporations that involve a Board of Directors and the management team won't give you as much flexibility as a sole proprietorship. Still, they also won't place as much of the onus of responsibility for the business on your shoulders alone. As for future needs, you want to be sure you can raise the funds you need to raise when, at worst, your business faces adversity or, at best, the time comes for your business to expand.
Forming Your Business
Once you've selected your business entity, you need a Charlotte NC-based tax advisor to help you form your business. When searching the CPA firms in Charlotte NC, you'll find you have many to choose from for a CPA for small business who's right for you. However, none will be able to provide you the same level of service, expertise, and personal attention as Scott Boyar, CPA. A tax advisor Charlotte NC can count on, Scott has been working as a CPA for small business owners in Charlotte and the surrounding area, helping them select and set up their business entities, for years.