Which entity should you file as?

In the first stages of starting a small business, many prospective business owners rarely think about their business structure and how it will affect their financial and operational requirements. To help you begin your business venture, we are going to list the various types of business entity types, along with their characteristics, so you can make an informed decision about your new business structure.

Sole Proprietorship

Managed by a single owner
The owner is personally liable for business lawsuits or liabilities.
Relatively easy to form and operate
Business profit and loss statements are reported on owner’s taxes
Minimum legal restrictions

Partnership

Two or more owners who manage and contribute to the business
Partners are personally liable for business lawsuits
Relatively simple and easy business structure
Owners report profit and losses on their personal tax returns

Limited Liability Company (LLC)

No limit to amount of owners
Owners are legally separated from the business (no shared liability)
Taxed like a sole proprietorship (of only one owner) or partnership (if multiple owners)
Extensive operating agreements
No standard for treatment across different states
Subject to self-employment tax
Required to hold annual meetings and record their minutes

Limited Liability Company

Legally separate from the owners
No limit on amount of shareholders
Revenue taxation on both company and shareholder dividends (double taxation)
Increased regulation and government oversight due to separation of business liability from owners

S Corporation

Owners are legally separate from the business
Double taxation on company profit and shareholder dividends
Limit on amount of shareholders
Required to hold meetings annually and record each meeting’s minutes

Still not sure what the best route is? We’re here to help!

This article is only intended to inform you about the most common business entity structures. If you have any questions regarding this article or your specific situation, don’t hesitate to call MBS Accountancy and our knowledgeable tax law experts and accountants will help you find your answers!