Eagle Business Solutions Blog: Choose A Business Structure: LLC, S Corp, C Corp, Partnership

Choose A Business Structure: LLC, S Corp, C Corp, Partnership

Business Structure:

Choose A Structure

For legal and financial purposes, you must have a formal structure for your business. Your four basic choices:

1. Sole proprietorship. The owner and the business are the same (usually a service business, with the owner providing the service). Business and personal tax returns are filed together. According to the U.S. Small Business Administration, more than 75% of all businesses operate as sole proprietorships.

Advantages: Simple and inexpensive (start-up costs are low); maximum control.

Disadvantages: Personal legal liability; limited ability to raise capital; succession issue.

2. Partnership. A business with more than one owner; divides profits and losses among participants. It's most appropriate for lawyers, doctors, and other professional service providers, but not for most new businesses.

3. Incorporation. A likely choice for businesses with employees or bank financing. It costs $500 to $1,000 or more for attorney and fees. A corporation is a state-chartered organization owned by shareholders. The shareholders elect a board of directors who are ultimately responsible for management of the business. There are two forms of for-profit corporations (see below).

Advantages: Personal assets are protected if the business fails or is sued.

Disadvantages: Taxes on profits are potentially higher than with sole proprietorship.
S corporation. So called because it is under subchapter S of the Internal Revenue Code; known as a Sub S.

Advantages: Most appropriate for start-ups; limits personal liability; eliminates double taxation.

Disadvantages: Taxes on many fringe benefits; limits on retirement benefits; restricts number of stockholders to 35.
C corporation. So called because it is taxed under regular corporate income tax rules.

Advantages: Limited liability; access to capital (can raise money through sale of stock); perpetual life (unlike sole proprietorship); ownership can be transferred.

Disadvantages: Profits are subject to double taxation (corporate income is taxed, and then dividends paid to stockholders are taxed as part of the individual's income); regulation and paperwork; start-up costs, including legal and filing fees.

4. Limited liability company (LLC). State-chartered organization that allows for the reduced personal liability of a corporation, but with the tax advantages of a partnership.

Advantages: Liability protection; no "member" restrictions; no double taxation; easier access to capital (compared with partnership).

Disadvantages: Tax and liability benefits vary from state to state; high costs of start-up.

Compare Organizational Structures

Identify the legal structures of your key competitors.
Why, in your view, did each competitor select its particular organizational structure?
How does their structure benefit or hurt them?
Select the structure that best suits your new company's needs. List three reasons why this option will benefit you. Similarly, for the remaining three structures, list reasons why they would not prove advantageous.
- Sole Proprietorship
- Partnership
- Incorporation
- Limited Liability Company (LLC)

Comparing Organizational Structures
Attribute	S Corp	C Corp	Partnership	Sole Proprietorship	LLC
Liability protection	Yes	Yes	No	No	Yes
Member restrictions	Yes	No	No	Yes	No
Double taxation	No	Yes	No	No	No
Transfer of shares	Yes	Yes	No	No	No
High cost of start-up	Yes	Yes	No	No	Yes/No *
Easy access to capital	Yes	Yes	Yes/No	No	Yes

*Can be high, particularly in states that have only recently adopted LLC regulations.

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