What Kind of Entities to Choose For Your Company?

Startup businesses often ask: Which entity should I choose? Indeed, choice of entity is a fundamental principle in startup law and one of the most important decisions a founder will make. The difference between starting a company that may potentially go IPO and managing a bakery is huge. Well, the only answer to the question above is to choose a formation that meets your needs. Here, we want to discuss the pros and cons of some of the most common types of entities.

Sole Proprietorship

On the flip side, you are also personally liable for all losses and debts. This type of business may suit the needs of people who want to have everything related to their business attached to them, as an individual, and under their control. A unique style local coffee shop, restaurant, or other small business may be good examples. It’s certainly the lowest cost way to start your own business but is also very risky (think: what if someone falls and hurts themself in your coffee shop?).

General Partnership (GP)

Limited Liability Partnership (LLP)

C-Corporation

The main disadvantage is the so-called “double-tax.” The corporation itself is taxed for any profits earned, and any individual stockholder who earns profits in the form of dividends from the corporation is also taxed. If you have such concerns, you have an option to establish an S-corporation.

S-Corporation

There are several requirements a company must meet to be granted the S-corporation designation. For example, it must be a domestic corporation, it can only have a limited number of shareholders, and it can only have one class of stock. Most importantly, all shareholders must be U.S. citizens or lawful permanent residents and not other corporations or LLCs. An S-corp is not a good choice for IPO or acquisition due to some of these restrictions.

Limited Liability Company (LLC)

You should also notice that some states have requirements that LLCs should have more than one member. In comparison with a Sole Proprietorship, an LLC is relatively cheap and easy to set up, yet can protect small business owners from unlimited personal liability. This makes it an excellent choice for small business owners who want to enjoy the protection of a company formation.

Professional Limited Liability Company(PLLC)

We hope to help you weigh the complexities of the different kinds of company formation by simplifying the categories into a graph.

Blue box with two columns, one lighter blue in shade, segmenting the different types of company filings by liability, ownership, and taxation.

Starting a business? Find a lawyer to help you decide which entity best suits your situation: https://www.sleegal.com

*The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.

Useful Links:

  1. https://www.justbusiness.com/legal/advantages-of-sole-proprietorship
  2. https://smallbusiness.chron.com/advantages-general-partnerships-4437.html
  3. https://smallbusiness.chron.com/limited-liability-partnership-advantages-disadvantages-4429.html
  4. https://corporatedirect.com/start-a-business/entity-types/c-corporation/
  5. https://corporatedirect.com/start-a-business/entity-types/s-corporation/
  6. https://www.bizfilings.com/toolkit/research-topics/incorporating-your-business/creating-an-llc
  7. https://www.fundera.com/blog/professional-limited-liability-company

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