The Difference in Business Entity Structures

Which One Business Structure is Best For Your Company?

The freedom to manage one’s own time, commitments, and work projects, make escaping the 9-to-5 to be a small business owner the dream of many. Along with the liberation, however, comes a myriad of responsibilities; especially when it comes to deciding how to initially structure your business entity.

There are five common types of business structures: sole proprietorships, corporations, S corporations (S Corps), partnerships, and limited liability corporations (LLC). Determining which company structure is best can be tricky. Today’s post examines these common business structures to explore which is best for your company. Check out The Difference in Business Entity Structures below.

Sole Proprietorship
Sole proprietorships are the most simple form of a business structure. This structure, like its name implies, is owned and run by one person. Profits and losses from the sole proprietorship are reported on the owner’s personal taxes; meaning the owner is personally liable for business activities. The entity is taxed at the owner’s personal tax rate, which, in some instances, can mean the company is taxed at a lower rate than standard corporate taxes.

Partnerships are a business entity where two or more people own and run a company. Similar to sole proprietorships, partnerships tie a company’s profits and losses to the owner’s personal income and tax filings. With this particular type of entity it’s highly advised to work with a business attorney to clearly detail partner responsibilities and liabilities. Partnerships formed between owners with the best of intentions can turn sour and, without prior legal documents, can cause severe legal headaches.

Corporations are among the most common business structures and are considered separate legal entities from the business owner; offering more legal protections for owners than sole proprietorships. For example, if the business entity has outstanding debts, the business owner will not be held personally responsible because the business has been established as an entirely separate, taxable entity. These types of entities may be eligible for special tax deductions because of this distinction between business and owner. Corporation’s shareholder dividends are taxed twice; once as profit for the corporation and second as shareholder income.

S Corporations
S Corporations, often referred to as S Corps, hold many similarities to standard corporations and important distinctions. For instance, the number of shareholders is capped at 100 under S Corp regulations. Another major distinction is that this entity structure prevents the double taxation that occurs for general corporations. This structure allows profits to ‘pass through’ to shareholders resulting in a single taxation for shareholders. S corps are required to be classified as such for a certain period of time before the option of transitioning to a standard corporation is allowed.

Limited Liability Corporations
Last but not least, Limited Liability Corporations (LLC’s) share similarities with partnerships but offer legal protection similar to corporations. In other words, an LLC protects company owners assets and shields from personal financial responsibility of company debt. LLC’s are not considered separate tax entities and profits are passed-through to avoid double taxation. LLC’s can be formed one of two ways; as either a 1. A single-owned business entity, resulting in taxation similar to a sole proprietorship or 2. businesses structure owned by two or more people, typically taxed as a partnership.

For personalized help specific to your situation, we advise working with your TrueNorth Retirement Services financial advisor and a business attorney for personalized help.