Business Structure & Entity Planning
Prosper Services assists you to get every benefit from your business through strategic structuring and entity planning whether you are starting a new business or looking for ways of maximizing your existing resources.
What Is An Entity?
An entity refers to a person or organization possessing separate and distinct legal rights, such as an individual, partnership, or corporation. In simplest terms, a business entity is an organization created by an individual or individuals to conduct business, engage in a trade or partake in similar activities.
There are various types of business entities and a business’s entity type dictates both the structure of that organization and how that company is taxed since an entity can own property, engage in trade, and enter into contracts-locally or internationally. Business owners often don’t fully appreciate the consequences of a business entity choice until faced with challenges. This choice will have important legal and financial implications for your business. The amount of taxes you have to pay depends on your business entity choice, as does the ease with which you can get a small-business loan or raise money from potential investors. Plus, if someone sues your business, your business entity structure determines your risk exposure.
State governments in the U.S. recognize more than a dozen different types of business entities, but the average small-business owner chooses between these six:
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- Sole Proprietorship
- General Partnership
- Limited Partnership
- Limited Liability Company
- C Corporation
- S Corporation
Which Business Entity Is Right For You?
When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by state statute.
Legal and tax considerations enter into selecting a business structure. It is extremely valuable to consult with an expert prior to starting a new business. Furthermore, to ensure that your business continues to benefit from its structure and maximizes its revenues, the following activities represent ideal opportunities to reconsider for your current entity type:
Buying an existing business
Entering into a joint venture
Developing intellectual property
Developing and offering new products or services
Accommodating new or future acquisitions
Our seasoned tax experts carefully evaluate your business objectives and work with you to assess the ideal entity structure to maximize cash flow while incorporating operational and tax considerations to minimize risk exposure and meet liability protection requirements.
Every business and its proprietor’s conditions are unique. There are delicate distinctions between entities, and you may be able to take advantage of more than one business structure.
THE MOST SUITABLE ENTITY TYPE FOR YOUR BUSINESS
SOLE PROPRIETORSHIP
A sole proprietorship is the simplest business entity, with one person or a married couple as the sole owner and operator of the business. If you launch a new business and are the only owner, you are automatically a sole proprietorship under the law. There’s no need to register a sole proprietorship with the state, though you might need local business licenses or permits depending on your industry.
Freelancers, consultants, and other service professionals commonly work as sole proprietors, but it’s also a viable option for more established businesses with only one person at the helm.
Sole proprietorships are by far the most popular type of business structure in the U.S. because of how easy they are to set up. But due to the liability risk, most sole proprietors eventually convert their business to an LLC or corporation.
PARTNERSHIPS
Partnerships share several similarities with sole proprietorships, but the main distinction is that the business has two or more owners. There are two kinds of partnerships: general partnerships, or GPs, and limited partnerships, or LPs.
GENERAL PARTNERSHIP
In a general partnership, all partners actively manage the business and share in the profits and losses.
Like a sole proprietorship, a general partnership is the default mode of ownership for multiple-owner businesses. There’s no requirement to register a general partnership with the state.
LIMITED PARTNERSHIP (LP)
Unlike a general partnership, a limited partnership is a registered business entity. To form a limited partnership, you must file paperwork with the state. In an LP, there are two kinds of partners: those who own, operate, and assume liability for the business (general partners), and those who act only as investors (limited partners or “silent partners”).
Limited partners don’t have control over business operations and have fewer liabilities. They typically act as investors in the business and also pay fewer taxes because they have a more tangential role in the company.
LIMITED LIABILITY PARTNERSHIP (LLP)
There is another business entity structure called a limited liability partnership, or LLP. In an LLP, none of the partners have personal liability for the business, but most states only allow law firms, accounting firms, doctor’s offices and other professional service firms to organize as LLPs.
These types of businesses can organize as an LLP to avoid each partner being liable for the other’s actions. For example, if one doctor in a medical practice commits malpractice, having an LLP lets the other doctors avoid liability.
CORPORATIONS
A corporation is a legal entity that is separate and distinct from its owners. Under the law, corporations possess many of the same rights and responsibilities as individuals. They can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.
C CORPORATION (C CORP)
A C corporation is an independent legal entity that exists separately from the owners of the company. Shareholders, a board of directors, and officers have control over the corporation, although one person in a C corp can fulfill all of these roles, so it is possible to create a corporation where you’re solely in charge of everything.
With this type of business entity, there are many more regulations and tax laws that the company must comply with. Methods for incorporating, fees, and required forms vary by state.
Most small businesses pass over C corps when deciding how to structure their business, but they can be a good choice as your business grows and you find yourself needing more legal protections. The biggest benefit of a C corp is limited liability. If someone sues the business, they are limited to taking business assets to cover the judgment and can’t come after your personal assets.
Corporations are a mixed bag from a tax perspective since there are more tax deductions and fewer self-employment taxes, but there’s the possibility of double taxation if you plan to offer dividends. Owners who invest profits back into the business as opposed to taking dividends are more likely to benefit under a corporate structure. Corporation formation and maintenance can be complicated.
S CORPORATION (S CORP)
An S corporation preserves the limited liability that comes with a C corporation but is a pass-through entity for tax purposes. This means that, similar to a sole prop or partnership, an S corp’s profits and losses pass through to the owners’ personal tax returns. There’s no corporate-level taxation for an S corp.
In order to organize as an S corporation or convert your business to an S corporation, you have to file with the IRS. S corporations can be a good choice for businesses that want a corporate structure but like the tax flexibility of a sole proprietorship or partnership.
LIMITED LIABILITY COMPANY (LLC)
A limited liability company takes positive features from each of the other business entity types. Like corporations, LLCs offer liability protections. But LLCs also have less paperwork and ongoing requirements, and therefore, they are more like sole proprietorships and partnerships.
Another great benefit is that you can choose how you want the IRS to tax your LLC. You can elect to have the IRS treat it as a corporation or as a pass-through entity on your taxes.
HOW TO CHOOSE THE BEST BUSINESS ENTITY TYPE?
Prosper Services offers you expert guidance in determining which type works best for your business. Consulting with our tax professionals on which structure is optimal for you enables you to have a strong and reliable foundation for your future endeavors.
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