Choosing the right business entity for your new or growing company is one of the most important decisions that you as a business owner will make, since your decision will impact important things like compensation and taxation. If you’ve given more thought to your company logo than the structure under which your business will operate, you need to realize what a disservice you may be doing your company and yourself in the long run.
Generally speaking, there are three key considerations that will impact your choice of business entity:
Risk management. In this litigious society, just about any business can expect to endure a lawsuit or two. If protecting your personal assets from potential business liabilities is important to you, then you need to consider a limited liability company (LLC) or corporate structure.
Taxation. Business owners whose companies operate as a sole proprietorship, partnership or LLC report their business profits and losses on their personal tax returns and net profits are taxed accordingly. A company operating as a corporation is considered a separate tax entity, so owners of corporations do not report their share of corporate profits on their personal returns. Although corporations are more complicated structures tax-wise, the lower corporate tax rate may be attractive to some business owners. Plus, if you are an employee of your own S-Corporation, you only pay self-employment taxes on the salary you pay yourself and all other distributions are not subject to self employment taxes. The savings can really add up!
Complexity of management. Corporations and LLCs have greater complexity than sole proprietorships or partnerships, generally requiring more meticulous record keeping and rules that must be followed to keep the corporate structure (and asset protection) in place.