Starting a New Business or Organization? Entity Selection is Crucial

Advisory & Consulting, Blog, Small Business Tax

During National Entrepreneurship Month, we celebrate those who have courageously stepped out to start their own business ventures. When starting a new business, there are a number of entity choices to select from. Some can easily be ruled out due to the details of your operation, but others will leave you wondering which is right for your venture. State statutes, federal regulations, and income tax laws all come into play when determining the appropriate entity.

The six basic entities are:
1. Sole Proprietorship: A sole proprietorship is owned by one person. The owner may also be the only worker. A sole proprietorship is not a separate legal entity. In a sole proprietorship, the owner receives all profits, bears all losses, and is personally liable for all legal claims that arise. Owners of a sole proprietorship can face legal action from accidents, faulty merchandise, employees, unpaid bills, and other business problems.
2. Limited Liability Company: Unlike a sole proprietorship, a limited liability company gives its owners protection from the claims of business creditors and others. Individual members’ liability within the LLC for debts is limited to the value of their interest in the business — hence the name “limited liability.”
3. C-corporation: A C-corporation is a legal entity owned by its stockholders united under a common name. Corporations issue stock and elect a board of directors to manage the company. Shareholders have limited liability for the obligations of the business. With a C-corporation, the corporate income is taxed twice. The corporation distributes its earnings as dividends to stockholders, and those dividends must be declared as personal income on their tax returns.
4. S-corporation: An S-corporation is similar to a C-corporation, but limits the number of stockholders to 100. Many small companies choose this option, because it’s a good way to avoid the double taxation of C-corporations, and also provides limited personal liability for the owners. There are some restrictions placed on S-corps, though, which can complicate matters. For example, there can be only one class of stock issued, and the corporation must be domestic.
5. Not-For-Profit Organization: A not-for-profit organization is set up with a specific mission to improve society, such as a museum, charitable foundation, religious organization, research group or trade association. It is not an option for a regular for-profit business. Not-for-profit organizations generally do not pay taxes on their income, cannot sell stock or pay dividends, and have strict requirements imposed on their activities.
6. General Partnership: A general partnership involves two or more owners who make decisions for the business together. Partners share profits, losses, and liability. Although a partnership can be very informal, it is generally considered a legal entity under applicable state law.

In addition, there are multiple sub-entities within some of these six categories. One of these sub-entities may be the correct choice for your new business. To find out for sure, contact us at Crippen & Co. to discuss your options. Entity selection is just one of the Strategic Business Planning services we offer. We can help decide which one is right for your operation, and offer other start-up guidance crucial to the success of a new entrepreneurial venture.

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