Businesses may change structure at any time. Here are the most critical items to consider when selecting—or re-selecting—your business structure.
1. Protection of personal assets—Sole proprietors and partners have unlimited personal liability for business debt or law suits against their company. Creditors can attach homes, cars, savings or other personal assets. Incorporating or forming an LLC helps separate your personal identity from your business identity. Corporation shareholders or LLC members have only the money they put into the company to lose.
2. Pass-Through Taxation—For sole proprietors and partners, company profits/losses pass directly through to their personal tax returns. For corporations, profits are taxed, then the profits that are distributed to shareholders as dividends are taxed again on the personal level. This “double taxation” can be avoided while still enjoying the benefits of personal asset protection by forming an LLC or by electing an S Corporation. S Corporations and LLCs can be taxed just like partnerships.
3. Uninterrupted business—Sole proprietorships and partnerships may automatically end or become legally entangled when one owner dies or retires. Corporations and LLCs are enduring legal business structures. They may continue regardless of individual officers, managers or shareholders. Corporation ownership may be transferred, without substantially disrupting operations, through sale of stock.
4. Access to Capital—Sole proprietorships and partnerships may find investors hard to attract because of personal liability. Investors are more likely to purchase shares in a corporation where they can separate personal and business assets.
5. Credibility with vendors and customers—Adding “Inc.” or “LLC” to your company name helps your business seem larger and more established!
Remember, the business entity you choose today may affect your choice of entity in the future. In other words, you’re not just picking a business form; you’re plotting a business strategy. The more information you have, the better equipped you will be to plot the right course.