A crucial step that entrepreneurs must take when starting a business is choosing a business entity for their company. Business entities have advantages and disadvantages. The type of business entity you choose depends on your desires, needs, and plans. A South Carolina business attorney can help you decide which entity provides the benefits you need for your business.
Comparing Pros and Cons of Business Entities
The four most common business entities used are sole proprietorships, partnerships, corporations, and limited liability companies.
Pros and Cons of a Sole Proprietorship
Many small business owners are sole proprietorships. A sole proprietor is someone who owns a full interest in an unincorporated business. Sole proprietors can begin working for themselves without filing any official forms or registering their business with the state. It is the easiest business entity to form, operate, and maintain. The owner is in full control over the business and reports the business income and loss on his or her personal income tax return.
However, there are some negatives to this type of business entity. A sole proprietor is personally liable for all debts and obligations of the business. Therefore, the owner’s personal assets can be seized for company debts. Also, when the owner dies, the business ceases operation. The assets are subject to the owner’s probate estate.
Pros and Cons of a Partnership
A partnership consists of two or more individuals who wish to conduct business together. The partnership agreement governs the relationship between the partners. There are several different types of partnerships: general partnership, limited partnership, limited liability partnership, and limited liability limited partnership.
The main difference between the various partnership structures is the personal liability of each partner. In a general partnership, all partners share personal liability for the partnership debts and obligations. They are also equally liable for any actions or decisions made by the other general partners. With a limited partnership, some partners have limited liability, but they are not involved in the management of the partnership. Limited liability partnerships are usually used for professional service businesses, such as law firms, accounting firms, and physician offices. Typically, the personal assets of each partner in a limited liability partnership cannot be used to satisfy partnership debts.
Partnerships are typically easy to create and maintain. However, partnerships involving limited liability may be more difficult and expensive to create compared to a general partnership. Also, partnership agreements must be carefully drafted to handle the death or exit of a partnership or the dissolution of the partnership.
Partnerships are not subject to double taxation. The partners share in the income generated by the partnership. The income is reported on the partners’ personal income tax returns.
Pros and Cons of a Corporation
There are also several different types of corporations: C-Corporations, S-Corporations, Professional Corporations, and Nonprofit Corporations. Each type of corporation may have specific pros and cons associated with that type of business entity.
In general, the main benefit of incorporating is to avoid personal liability for company debts. The shareholders of a corporation are not personally liable for the debts or obligations of the company. Their personal assets are not at risk.
However, corporations are more costly to form and maintain. In addition to filing Articles of Incorporation with the state, the corporation must file annual reports. It must also have bylaws that govern the company’s operations. A board of directors oversees the company. The board answers to the shareholders who appoint the board members. The board appoints officers who are responsible for the day-to-day operations of the company.
Corporations are subject to double taxation. The income from the business is reported and taxed on a corporate tax return. The dividends paid to shareholders are considered income and must be reported on the shareholders’ personal income tax returns.
Pros and Cons of a Limited Liability Company
A limited liability company (LLC) offers many of the benefits of a corporation and partnership without some of the disadvantages. An LLC’s members (owners) have limited personal liability for company debts and obligations. Profits pass through the LLC and are reported on the members’ personal income taxes, so the company profits are not subject to double taxation.
However, an LLC must register with the state and have an operating agreement that governs how the company functions. In some cases, it can be difficult for members to sell their interest in the company or leave the company. Operating and maintaining the LLC can be more expensive than a sole proprietorship or partnership.
Contact a South Carolina Business Attorney for Help
Choosing a business entity for your company can be confusing. The above pros and cons of business entities are a brief introduction to the various entities you might consider for your company. Contact Willcox, Buyck & Williams, PA for more information today. Our South Carolina business attorneys can conduct a full evaluation of your business venture and provide a detailed legal analysis of the pros and cons of each business entity in relation to your unique situation.