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.
Ardasss

About Ardasss

Satpreet Singh completed his Masters Degree in 2005 From Guru Nanak Dev University, Amritsar. He has vast experience in the field of full accounting (individual and business), tax preparation, business Formation and consultation. He represents clients in the unlikely event of audits. Satpreet Singh has led ARDASS Incorporated as CEO and President since 2012 with his leadership management skills. He is an IRS Enrolled Agent and a Registered Tax Return Preparer (RTRP) and is also registered with the California Tax Education Council (CTEC) as a tax preparer.