One of the main issues that startups encounter when forming their business is determining what type of entity would best suit their company. There are so many and they all sound confusing! But don’t fret because this will clear everything out.
You are the business and the business is you, there is no distinction. It is the easiest to form and operate because you, as an owner, don’t need to file any paperwork for it. In terms of the earnings that you get and the taxes that you file, it is no different than from what you will usually file. You will report any business profit or loss on your personal tax return. However, the owner is personally liable for any lawsuits filed against the business and your personal assets are at risk from being taken by creditors if anything were to happen to the business.
It forms once a sole proprietor brings on a partner into the business. Like a sole proprietorship, there is no need for paperwork to be filled out. This is not the most reliable form of business because it can bring along with it many disadvantages. For example it is not protected like the LLCs when it comes to liability. Each partner is responsible for everything that the business involves, it one person makes is not reliable or makes a mistake, you are responsible for it, it doesn’t matter if you or your partner did it, and everyone’s assets are fair play, which is what makes this type of entity quite dangerous if you are not careful.
C Corporations or Corporations
In a corporation your business is separate from you in every way. They are independently legal and have a different tax system. You will be subject to a corporate tax rate instead of a personal rate, where the tax that the company has to pay depend on the total profits that the company makes as opposed to the business’ gross income. Additionally, there is no limit in the number of shareholders or transferability of member shares. This type of entity is great for business that plan on eventually going public, however, for small business it might be a little overwhelming with all the record keeping and paperwork involved.
Limited Liability Companies
Like the C Corporations, LLCs have independent legal structures detached from their owners. So you can keep your personal assets safe even if you have business debts. In addition to that, LLCs also have another level of protection called Charging Order Protection, which means that if you get sued your company will not be affected or taken away. In terms of taxation, LLCs act like a sole proprietorship if one person only owns it; this means that you will fill it in your personal income tax. If there are multiple owners, then it will be taxed like a partnership.
B Corps or Benefit Corporations are for-profit based entities that include a positive impact on society and the environment in addition to profit as its legally defined goals. Another way to look at this type of entity is by explaining it as a hybrid between a non-profit organization’s values while simultaneously pursuing profits like a regular corporation. In every other way it acts like a corporation.