There are several different types of business organizations that you may choose from when setting up your business. Each business entity has certain advantages and disadvantages that may make one entity preferable over other entities based on your specific circumstances. Our South Carolina business formation lawyers review the four most common types of business entities in this article and some of the pros and cons of each business structure.
The Sole Proprietorship
Single, small business owners often choose this type of business organization. It is not a legal entity separate from the business owner. In most cases, it is a fictitious name that someone does business under, such as Tim’s Plumbing Service. The name is just a trade name instead of a legal entity.
Advantages of a sole proprietorship include:
Easiest, simplest, and least costly business entity to form and operate.
- Complete control and flexibility.
- You can register your name, obtain a business license, and begin conducting business.
- The business does not pay separate taxes. All income passes directly to the owner and is taxed at the owner’s personal tax rate.
Disadvantages of a sole proprietorship include:
The main disadvantage of a sole proprietorship is that the owner has unlimited personal liability for all business debt. If the business
A partnership is a separate legal entity created by two or more individuals who engage in business for profit. Partnerships are not difficult to set up and operate, but to protect each partner, a comprehensive partnership agreement should define each person’s interest, liability, and role within the partnership.
Advantages of a partnership include:
- Limited partnerships and limited liability partnerships offer some degree of liability protection for partners.
- Partnerships are easy to maintain because they do not require annual meetings or minutes of meetings.
- Partnerships do not pay corporate taxes. The profits and losses pass through the business to each partner, according to the partner’s interest in the business.
- Can be used by professionals who may not be able to create an LLC.
Disadvantages of a partnership include:
Individual partners may bear the liability for the actions of other partners.
- Partners may have unlimited personal liability for debts and losses, except in the case of limited liability partnerships and limited partnerships.
- If a partnership is created without a written agreement or a partnership agreement is poorly drafted, there could be significant disputes that may lead to costly litigation.
The Limited Liability Company
A limited liability company (LLC) is a legal business entity that is separate and apart from its owners (members). LLCs combine some of the best advantages of a partnership with the advantages of a corporation. Each state passes laws that govern the creation and operation of an LLC.
Advantages of an LLC include:
- LLCs may choose to be taxed as a sole proprietorship (pass-through entity) or a partnership.
- Owners have limited liability. They are not liable for the company’s obligations or debts.
- LLCs are relatively easy to set up through the state’s Secretary of State’s Office. Members are not required to conduct annual meetings and have very few ongoing formalities or corporate filings with the state.
- LLCs offer a great deal of flexibility in how the LLC is managed.
- LLCs can be converted to a corporation if the company outgrows the limitations of an LLC.
- You may create a single-member LLC or create an LLC with multiple members.
Disadvantages of an LLC include:
- LLCs are typically not suitable for companies that want to seek venture capital or pursue an initial public offering in the future.
- Some professional groups may not be permitted to operate an LLC.
- Transferring an interest or accepting new members can be difficult, depending on the terms of the operating agreement.
- Members may be held liable for company obligations in some cases.
A corporation is the most formal business entity. It is a legal entity that is separate from its owners (shareholders). In the eyes of the law, a corporation is a legal person. The shareholders elect a Board of Directors to operate the corporation. The directors, in turn, appoint officers to manage the day-to-day operations and make high-level decisions for the company.
Advantages of a corporation include:
- Corporations have an unlimited life span. Shares may be transferred, purchased, and sold.
- Owners are protected from personal liability for the company’s obligations and debts.
- Corporations have several options for raising capital.
- Corporations are the preferred business entity for public companies.
Disadvantages of a corporation include:
- Corporations are subject to double taxation. A corporation must file a corporate tax return and pay taxes based on its profits based on the corporate tax rate. Distributions to shareholders are taxed at the shareholder’s personal tax rate.
- Setting up and managing a corporation is more difficult and expensive. Corporations require annual meetings, minutes of meetings, and other formalities.
- The periodic filings and annual fees for corporations can be burdensome and costly for some businesses.
- Much less flexibility because of regulations governing corporations.
Consult a South Carolina Business Formation Attorney
Choosing a business entity is a crucial decision. These pros and cons are not an exhaustive list of the reasons why you may or may not want to choose a specific business entity. Consulting a South Carolina business formation attorney before choosing your business form can help you avoid unnecessary costs and problems in the future. Schedule a consult with a member of our team at Willcox, Buyck & Williams, P.A. today.