Whether you plan to work entirely alone or have hundreds of employees, you will need to decide which corporate structure is most appropriate for your business. You should not make this decision lightly as it is one of the most important business considerations you face. Below is a brief description of each alternative.
If you conduct business on your own without formally creating an organization, the Internal Revenue Service (IRS) considers you a sole proprietor. It requires little to no paperwork to operate under this corporate structure, and the IRS doesn’t separate you from your business.
The advantages to sole proprietorship include that it’s simple to form, you retain complete control over all decisions, and you carry gains and losses to your tax return for a simple filing experience. On the downside, you risk your personal assets and could lose them if someone successfully sues you. You also need to make both the employee and employer contribution to Medicare and social security.
A partnership can consist of two or more people who pool their assets together to form a new company. The partners then share profit and loss based on the percentage of their contribution. Rather than pay income taxes directly, partners pay tax based on the pass-through method on their personal income tax returns. While this corporate structure allows for the business to benefit from the strengths and experiences of each partner, it can also create disagreements among partners.
Limited Liability Company (LLC)
Owners of an LLC report their business income and expenses on their personal tax returns. The main advantage of this business structure is that it protects owners from personal liability if someone sues their company. It’s also easy to determine the percentage of profit earned by each individual. Like sole proprietorships, businesses operating under the LLC structure must pay the employer and employee portions of Medicare and social security.
As your business grows, you might wish to eventually pursue a C-Corp or S-Corp status. We would be happy to discuss all options and help you weigh the pros and cons of each during a personal consultation with Impact Commercial Capital.