When you decide to start your new business, deciding what type of business you will form represents the first decision you must make. Your decision will have long-lasting consequences, not only for your business but also for you personally.
The IRS offers some guidance by listing the following as the most common business types and the pros and cons associated with each:
- Sole proprietorship
- Limited Liability Company
If you plan to be your company’s only owner, a sole proprietorship represents the simplest entity you can form. Basically, you and your business are one. Consequently, all you need do is begin selling your product or service. When tax time comes, you personally pay your company’s taxes, calculating them by means of a Schedule C attached to your 1040 return.
If your business will have additional owners, a partnership may be a good choice. Here you should have a written partnership agreement that clearly delineates each partner’s ownership interest and responsibilities. While the partnership must file an informational return each year, the taxes pass through to the partners proportional to their ownership interests.
The main benefit of a corporation is that this entity form limits the personal liability that you and the other shareholders otherwise face. On the other hand, not only must the corporation pay its own income taxes, but each shareholder likewise must pay income taxes on his or her share of profits.
Limited Liability Company
If you desire the set-up ease of a partnership and the limited liability of a corporation, an LLC likely represents your wisest choice. In addition, an LLC gives you the tax pass-through benefits of a partnership while eliminating the necessity of holding annual meetings at which you must record minutes.