Type of Entity Structures

There are several types of entity structures. When choosing an entity structure consider the tax and non-tax implications for your business. The entity choice is a long-lasting decision that can dramatically impact the results of your operations. Please do consult with a professional when making the entity decision. If you have questions regarding what structure to choose please call for assistance. By discussing your business situation and plans, together we may determine the best entity structure for you in as little as ten minutes!

SOLE PROPRIETORSHIPS: The sole proprietorship is the same taxable entity as the individual who owns the proprietorship. As a sole proprietor you include a Schedule C as an attachment to your annual Form 1040 income tax return. As a sole proprietor you face the danger of unlimited liability. This means that creditors of the business may file claims not only against the business, but also against you individually and all assets that you own. Sole proprietorship is ideal for low risk business ventures that generate profits up to but not more than the fair value of the proprietor’s personal efforts.

PARTNERSHIPS: Partnerships are not subject to income tax. The partnership net profit (loss), reported on IRS Form 1065, flows through to each partner on Schedule K-1. Each partner is responsible for paying income and self-employment tax on the business profits. Like a sole proprietorship, the general partners have an unlimited liability. Partnerships provide the opportunity to specifically allocate items of income and expense according to the economic reality of the partnership agreement. Limited partners may have some liability protection from partnership debts while benefiting from allocation of non-recourse debt.

LIMITED LIABILITY COMPANIES: Operating as an LLC allows an entity to avoid unlimited liability. This is a non-tax consideration when choosing an entity structure. The tax advantage of an LLC is that it may be treated as a partnership for tax purposes therefore avoiding the problem of double taxation that is associated with C Corporations. A single member LLC can be a disregarded entity for tax purposes allowing the simplicity of filing as a sole proprietorship. LLC statue varies according to state law, so may not be best for multi-state businesses. LLC is often ideal for real estate deals and offers opportunities for estate planning.

S CORPORATIONS: S corporations do not generally pay Federal income tax. (There are special situations when S corporations do pay tax.) Like partnerships, the profit or loss from S Corporations flows through to the shareholders, but unlike partnerships, the shareholders may have liability protection under the corporate shield. S Corporation structure is often ideal for owner-operated small business that generates profits in excess of the fair value of the owners’ services. The owner/operator of an S corporation wears two hats: investor and employee. You may structure your transactions to take the best advantage of the available tax law!

C CORPORATIONS: Regular corporations pay taxes on their taxable income. This can cause a double taxation effect. The corporation pays taxes based on the net income reported on its tax return. Then, when the corporation distributes its income to the shareholders as dividends, the shareholders report the dividend income on their individual tax returns. Thus, income that has been taxed to the corporation is again taxed to the shareholder. Like the S Corporation, regular corporations have liability protection. C Corporation is ideal for capital-intensive business. Taxes can be paid on corporate profits at lower corporate rates. The after tax profits can be reinvested by the corporation for equipment upgrades and expansion of the business.

Many factors should be considered when making the proper entity choice for a new business. Entity charts can be helpful to understand distinguishing characteristics of the various entity types. Charts can also over-simplify. USE CARE! The entity choice is a long lasting decision that can dramatically impact the results of your operations. You may call me to discuss your business and determine the best entity structure for your business.