There are a few different types of business entities to consider when starting a new company. Below we’re highlighted some pros and cons of each business type so you can find the right one for you.
LLC
What makes it unique
- LLC’s (or Limited Liability Company‘s) are better for flexibility in how you manage and run your business; as a board of directors is not required
- LLCs can have unlimited owners (or “members”) allowed
Taxation / Protections
- You are not personally on the hook for business liabilities
- LLC’s are taxed once or twice per year. As an owner, you are free to choose which can help minimize taxes
Disadvantages to consider
- Ongoing filings and fees to stay in compliance
- LLCs can’t go public
- Not recognized globally; you may be taxed as a corporation in other countries
S-corporation
What makes it unique
- Better for smaller corporations
- 100 shareholders max
- Owners can only get common stock
Taxation / Protections
- You’re not personally on the hook for business liabilities
- Taxed once—only shareholders pay on profits received
Disadvantages to consider
- Ongoing filings and fees to stay in compliance
- Less management flexibility; must have a board of directors
- More admin; strict rules about holding meetings and keeping records
- All shareholders must be U.S. citizens or residents
C-corporation
What makes it unique
- Best if you plan to go public one day; can issue shares to founders, employees, and investors
- Unlimited owners (aka “shareholders”) allowed
- Owners may get preferred stock
- Recognized internationally
- Preferred by investors
Taxation / Protections
- You’re not personally on the hook for business liabilities
- Taxed twice—business pays at the corporate level, and shareholders pay on income received
Disadvantages to consider
- Ongoing filings and fees to stay in compliance
- Less management flexibility; must have a board of directors
- More admin; strict rules about holding meetings and keeping records
Non-Profit Company
What makes it unique
- Best if you’re supporting a good cause and want to protect your personal assets
- No owners; you can start or oversee a nonprofit, but you can’t technically own it
- Looks more official to potential donors
- Gives you access to public and private grants
Taxation / Protections
- You’re not personally on the hook for business liabilities
- Tax exempt—if you have 501(c)(3) status with the IRS
Disadvantages to consider
- Ongoing filings and fees to stay in compliance
- Less management flexibility; must have a board of directors
- More admin; strict rules about holding meetings and keeping records
- Pricier application and filing fees if you try for 501(c)(3) tax-exempt status
Sole proprietorship
What makes it unique
- Better if you need an easy set-up
- No paperwork to start; you may still need a DBA or business licenses to operate legally
- One owner max
Taxation / Protections
- You’re personally on the hook for business liabilities
- Taxed once—you pay on profits in your personal tax return
- Less hassle; separate tax return not needed
Disadvantages to consider
- No personal liability protection
The choice between the types of business entities depends on your circumstances
As you can see, the 5 types of business’ are varied. Choosing among these different types of business will affect your daily workings as well as how you pay taxes. Your choice can also affect how well you are protected as an owner. And the type of business entities also affects your future ability to sell your business. Please contact us if you’d like to dig in and really learn more about the types of business available. We are happy to assist you further to help you choose which type of business entity is the best fit for your company.
