The form of incorporation that a business chooses, is known as a business entity, and LLCs and corporations are common types of legal entities, and there are also sole proprietorships and general partnerships which don’t require incorporation, and do not have the same rights and privileges as incorporated legal entities.
Let’s start by looking at corporations:
As one of the oldest forms of business entity, corporations are the preferred legal entity for businesses that already are, or plan to be publicly traded. There are a number of other reasons to choose a corporation, too.
What are corporations best used for?
- Seeking venture capital or other outside investment
- Ongoing profitable business
- Management looking for traditional structure
What are corporations not so good for?
- Anyone needing or wanting pass-through taxation
- Anyone who doesn’t like to hold regular meetings and deal with formality
What are the main advantages of a corporation?
There are several advantages of a corporation, here are just a few:
- Limited Liability protection for the owners
- The ability to raise outside investment
- Decades of legal precedents to follow
- Well-understood legal structure
What are the main disadvantages of a corporation?
While many choose to form a corporation for the reasons outlined above, there are some disadvantages that it’s important to be aware of:
- Strict formalities that must be followed
- Corporate tax returns to be filed every year
- Annual taxes, fees and reports to file and pay
- Double taxation subject to tax on worldwide income for C Corporations
Let’s look at LLCs next:
Owners of LLCs are known as members, and those who run an LLC are called managers, and there are no restrictions on the number, or type of owners of an LLC.
What are LLCs best used for?
- Owners looking for a less formal business structure
- Investing in real estate and passive investments
- Corporate subsidiaries
What are LLCs not so good for?
- Anyone seeking professional investment (venture capital)
- Non-US residents doing business in the US, especially Canadians
What are the main advantages of an LLC?
There are several advantages of forming an LLC, here are just a few:
- Owners get limited liability protection
- Easy to maintain
- Flexible for both legal and tax purposes
- Flexible allocation of profits/losses among members
What are the main disadvantages of an LLC?
While many choose to form an LLC for the reasons outlined above, there are some disadvantages that it’s important to be aware of:
- Tricky to use for getting outside investment
- Setting up can be difficult, especially if there are multiple members
- Can become complex if new members are added, or existing ones leave
- Member owners must pay self-employment and unincorporated business taxes
- Can be complicated to close down
- If a member lives in another state, taxes can get complex if they’re active in company management
Now let’s take a look at sole proprietorships:
As a one person business entity, sole proprietorships are not incorporated, are not subject to double taxation and do not provide any liability protection; the owners assets are fully exposed.
What are sole proprietorships best used for?
- Anyone not seeking a long term commitment
- Easy to start and stop
- Taxes are simplified
What are sole proprietorships not so good for?
- Anyone wanting limited liability
- Anyone wanting to build up a real business
- Anyone who wants to hire employees or have other liability risks
What are the main advantages of a sole proprietorship?
There are several advantages of sole proprietorships, here are just a few:
- They’re fast, easy and cheap to form alone
- They’re easy to close/end
What are some of the main disadvantages of a sole proprietorship?
While many choose a sole proprietorship for the reasons outlined above, there are some disadvantages that it’s important to be aware of:
- Zero liability protection
- Hard to gain outside funding
While this brief guide outlines the pros and cons of the 3 main business entities, you may still benefit from seeking expert help in selecting the right entity type for your specific circumstances and goals.