If you’re starting a new business, one of the most important choices you’ll make is selecting the type of legal structure for your company. This decision will affect a variety of critical elements involved in your business, including your tax rate, the amount of paperwork needed to document your business and ensure it runs efficiently and according to the law, and personal liability.
As you make this important decision, you may be deciding between various options, including an “LLC” or a “sole proprietorship.” For many, the distinctions between these terms may seem complicated and confusing. However, there are key differences that may help you determine which best applies to your business.
Understanding Business Entities
Businesses can identify as one of a number of types of entities, including:
This is the most common type of business. It’s the easiest of the business entities to form, and you have total control of the company. All financial and liability responsibilities are also yours.
In general, two or more people form a partnership and agree to share all profits and losses. One advantage of this business entity is that each partner reports these profits and losses on his individual income tax returns. The partnership does not bear the tax burden, and the profit and losses are “passed through” to the partners. One disadvantage is that each partner is personally responsible and liable for all financial obligations.
This type of business entity is usually more complicated and most often used for large companies that have many employees and is well established. One advantage of a corporation is that the personal assets of the owners are protected—they do not have personal liability. One disadvantage is that it costs more to form a corporation, and there is usually a fair amount of paperwork involved.
Limited Liability Companies (LLC).
This business entity is a mix of both a corporation and a partnership. An LLC offers the limited liability features that a corporation enjoys and the flexibility and tax efficiencies of a partnership.
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