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Pros and cons of business entity types

When starting up a business, choosing the structure that best aligns with your goals is one of the most important decisions to make. While there are many entity choices available, understanding each one's functions, benefits and downsides can help guide you in the right direction. Here are some common business types to consider:

Business corporation

A corporation is owned by its shareholders and the company can choose to sell shares of ownership through stock. This structure is generally used for larger businesses.

Pros:

· Corporation is liable for its actions and debt, which protects shareholders' assets

· Corporation is taxed as its own entity

· Selling stock provides capital

· Stock incentives attract dedicated employees

Cons:

· Costly startup, including startup tax

· Lengthy startup process with lots of paperwork

· Can face double taxation

S-Corporation

An S-corporation is a type of corporation that can send taxes through to its owners instead of the corporation itself, avoiding double taxation. However, it has strict regulations it must follow. In addition to converting a traditional corporation to an S-corporation, an LLC can also convert to an S-corp for tax purposes.

Partnership

Partnerships are business entities owned by at least two people, or partners. All partners contribute to all aspects of the company and they share the profits and losses together.

Pros:

· Inexpensive and easy to start

· Variety of resources and skills from each partner

· Partnership incentives attract dedicated employees

Cons:

· Partners' personal assets are not protected

· Profts/losses are split equally, even if partners do not contribute equally

· Everyone is liable for others' actions and the partnership's debt

Limited Liability Company (LLC)

An LLC is owned by members, which can be individuals or corporations.

Pros:

· Inexpensive and easy to start

· Personal assets are protected in cases of debt or lawsuits

· Members decide on the operations and distribution of profit

Cons:

· Members are taxed as if they are self-employed

· There are important legal steps to follow if a member leaves the LLC

Limited Liability Partnership (LLP)

An LLP functions mostly like a partnership but has the benefit of protecting partners from liability in others' actions. Partners are, however, still liable for company expenses or loans.

LLPs are limited to a select few industries. Generally, in California, only legal, accounting or architecture companies may form an LLP.

Advice on choosing a structure

While it is crucial to research business entities and understand the reasons for choosing a particular structure, many entrepreneurs also benefit from consulting a business law attorney. They can give advice on starting up a company, answer any questions you have and guide you on which choice could benefit your company most.

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