Hey there, business owners! If you’re setting up a business or even considering changing your current structure, you’ve probably come across terms like “LLC,” “S-Corp,” and “Sole Proprietorship.” Choosing the right business entity can feel like a big decision, but don’t worry—we’re here to break down the options in a way that’s straightforward and actually helpful.
Each entity type has its own pros and cons, so let’s dive into the most common ones to help you figure out the best fit for your business.
Disclosure: We’re accountants (though we may not be your accountant) and not attorneys. We highly recommend consulting with your legal counsel and accountant to ensure you fully understand the expectations, consequences, and implications of any legal entity decisions you make. It’s always best to review these important matters with the appropriate professionals to ensure everything aligns with your goals and compliance requirements.
1. Sole Proprietorship
A Sole Proprietorship is the simplest type of business entity. If you’re a one-person show and haven’t formally set up an LLC or corporation, congrats—you’re probably already a sole proprietor!
- Fact: Sole proprietorships are automatically established as soon as you start doing business. There’s no paperwork required to “set it up.”
- Pro: Super simple to start and run. You’re in full control, and all income passes through to your personal taxes.
- Con: There’s no separation between you and the business. This means your personal assets are on the line if anything goes wrong.
2. Partnership
Partnerships come in a few flavors, but the most common is the General Partnership (GP), which is just like a sole proprietorship, but for two or more people. You also have options like Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) for more structure.
- Fact: Partnerships are often used when two or more people want to combine resources and share ownership without creating a corporation.
- Pro: Easy to set up, with shared management and tax responsibilities.
- Con: Like sole proprietorships, general partnerships don’t offer liability protection, meaning both partners’ personal assets are at risk if the business is sued or has debt issues.
3. Limited Liability Company (LLC)
LLCs have become wildly popular for small business owners because they offer flexibility, simplicity, and liability protection. This structure separates your personal assets from the business, giving you some legal protection if things go sideways.
- Fact: LLCs can be taxed as a sole proprietorship, partnership, or even as an S-corp, depending on what makes the most sense for the business.
- Pro: Liability protection! If your LLC gets sued, your personal assets (house, car, bank account) are generally safe – as long as you don’t pierce the corporate veil.
- Con: Costs more than a sole proprietorship or partnership to start and maintain. Plus, in some states, there are annual fees or reports required.
4. Corporation (C-Corp)
A C-Corporation is the classic, big-business structure. It’s its own legal entity, meaning it can own assets, incur liabilities, and even be sued independently of its shareholders.
- Fact: Corporations can issue stock, which is a big deal if you’re looking to attract investors.
- Pro: Limited liability, and there’s no cap on the number of shareholders, which is ideal if you plan to go public someday.
- Con: “Double taxation”. C-corps pay taxes on their income, and shareholders also pay taxes on dividends. They also come with more legal requirements and paperwork.
5. S Corporation (S-Corp)
An S Corporation is like a C-Corp but designed to avoid “double taxation”. S-corps are usually small businesses because they’re limited to 100 shareholders and must be U.S. citizens or residents.
- Fact: An S-corp isn’t a different type of business entity; it’s a tax designation. You first set up an LLC or C-corp, then apply for S-corp status with the IRS.
- Pro: Pass-through taxation. Profits (and losses) pass through directly to your personal taxes, avoiding the “double tax” issue of C-corps.
- Con: S-corps have strict eligibility requirements, including the 100-shareholder limit. They also require more administration than an LLC, including paying yourself a “reasonable salary” via payroll.
6. Nonprofit Corporation
If you’re creating a business with a charitable, educational, religious, or scientific purpose, a Nonprofit Corporation might be the right fit. Nonprofits can apply for tax-exempt status with the IRS, which exempts them from federal income tax.
- Fact: Nonprofits can accept donations, which may be tax-deductible for the donor.
- Pro: Tax exemption if you meet IRS requirements, plus a structure that helps attract grants and donations.
- Con: Nonprofits have to follow strict rules around how money is spent, and all profits must go back into the organization, not into the founder’s pocket.
Quick Recap: Choosing Your Entity
Each business entity type has unique benefits and challenges. Here’s a quick rundown to help guide your decision:
- Sole Proprietorship: Great for freelancers and solopreneurs, but no liability protection.
- Partnership: Ideal for 2-3 business partners wanting a simple setup but without liability protection.
- LLC: Flexible and protects your assets, making it a great fit for many small businesses.
- C-Corp: Good for businesses aiming for big growth, investors, or even going public.
- S-Corp: Tax-efficient choice for small businesses that qualify and want pass-through taxation.
- Nonprofit: Best for mission-driven organizations focused on social impact over profit.
Need help deciding or setting up your entity? Hill Bookkeeping & Consulting is here to guide you through it. Each structure has its nuances, and choosing the right one can set you up for long-term success. Let’s make sure your foundation is solid—contact us to get started!
