Business Entity Selection

One important consideration when starting your business is determining the best legal structure of your business. Your selection of legal structure will affect operating efficiency, transferability, control, the way you report income, the taxes you pay, and your personal liability.

Here is the comparison of some of the basic considerations while selecting one of the five most common structures for your business entity:

  Sole Proprietorship(SP) Limited Liability Partnership (LLP) Limited Liability Company (LLC) S Corporation C Corporation
Limited liability No Yes (for LPs only) Yes Yes Yes
Perpetual life No No Yes Yes Yes
Eligibility Physical persons No limitation No limitation (Limited if “S” election is made) U.S. citizens or permanent residents No limitation
Maximum shareholders Single owner Unlimited Unlimited members 100 Unlimited
Minimum ownership 1 2 or more 1 in many states 1 1
Ownership by other corporate entities N/A Yes Yes No Yes
Classes of stocks No No No Yes Yes
Flow through entity N/A Yes Yes (if treated as SP, Partnership or S Corp) Yes No
Double taxation No No No(unless treated as a C Corp) No Yes
Tax flexibility Medium Medium Highest Medium-high Low
Federal tax forms 1040 (Schedule C) 1065 1040, 1065, 1120S or 1120 1120S 1120

The choice of a legal structure can be complicated and errors can be costly. In addition, current tax laws make it difficult to change your legal structure after you begin operating. Making the right decision before you open for business is very important.

Consult with a CPA who can help you decide what type of entity and structure is best for your situation and type of business, explain how business structure affects your organization’s bottom line, and file the necessary paperwork to start your business.

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