Pros and Cons of Different Business Entities

Which Business Formation Would Be The Best For You?

ardass-business-formation-serviceCorporation

Pros

  • The owners (shareholders) have protection from legal liability.
  • The ability to issue stock is a strong selling point for investors.
  • The corporate business form has a power structure with directors, officers, and shareholders with defined roles and responsibilities.

Cons

  • Incorporation can be expensive and time-consuming with filing fees and required documentation.
  • Corporate laws must be followed, i.e., meetings of directors, records, financial independence.
  • There may be potential tax liability as profits may be “double” taxed.

LLC

Pros

  • An LLC allows for a more flexible management structure.
  • The owners and shareholders pare protects from personal liability.
  • An LLC has tax options, it can choose to be taxed as sole proprietorship, partnerhsip, S corp, or corporation
  • There are less compliance regulations.
  • Investors have little or no say in the daily operation as long as it is stated in operating agreement.

Cons

  • LLC’s have “pass-through” taxation which means that any profits and losses are reported on each owner’s (or shareholder’s) individual tax returns whether dividends were paid or not.
  • Lack of strict corporate structure and pass-through taxation may be perceived as a negative by investors.
  • Many states require LLCs to pay a “capital values tax” or franchise tax.
  • Less structure in business government may mean that a detailed operating agreement needs to be in place and could require additional costs.

S Corporation

Pros

  • S Corps have no “double taxation” with profits and losses passing through to the owner’s personal income tax.
  • On selling an S Corporation, there may be reduced taxable gains.
  • The expenses and losses, particularly in start-up of your business, can be offset against your personal income whereas in a regular corporation, it cannot.
  • S Corps have liability protection although it is not complete protection.

Cons

  • S Corporation can issue only one class of stock which can limit control and stock value.
  • Venture capitalists will not want to invest in a company that has pass through taxation or a limit of 75 shareholders.
  • S Corps must file a tax return every year.
  • Status is still a corporation so you must have regular meetings and maintain company minutes.

Partnership

Pros

  • Partnerships allow a shared cost of start-up.
  • Partnerships share responsibilities and work.
  • Partnerships share risks and expenses.
  • Each partner may contribute complementary skills and contacts that result in greater financial success than if they were separate.
  • There is mutual support and motivation.

Cons

  • Partners are jointly and individually liable for all debts, not just half of them.
  • Profits are shared.
  • There is no “total” control over the business as decisions are shared, and this may lead to disagreements.
  • Friendships may not survive partnerships.

DBA

Pros

  • Doing Business As (DBA’s) are easy and relatively inexpensive to form.
  • DBA’s are easy to operate.
  • There is no double taxation of income
  • DBA’s are allowed to operate in all jurisdictions.
  • DBA’s provide the ability to have multiple businesses under the same owner.

Cons

  • A DBA does not provide for legal protections for the business owner and owners are liable for all legal problems.

Sole Proprietorship

Pros

  • A sole proprietorship is easy to form since it requires only a few forms and needs only be filed with the local city or county clerk’s office.
  • You have total control of the money.
  • You make all the business decisions.
  • You are the management and can respond quickly to daily issues.
  • There is less government control and taxation.
  • You do not have to file for the business or have to prepare a balance sheet.

Cons

  • There is unlimited liability as you are responsible for all business debts and obligations.
  • An illness, death, or incapacity of the owner can result in the termination of the business.
  • It is more difficult to raise financing due to fewer assets.
  • A sole proprietorship may seem less professional than other business entities.