You might not be aware of this but selecting the proper business entity is an incredible important part of being a business owner. Fortunately, we’re here to help you break it down and understand the pros and cons of the most popular business entity types. So whether you’re a one-person show, or have a team of twenty, we’ll help you figure out the best business entity type for your business. Spoiler Alert: Picking one at random isn’t going to help you.
Before we dive into the different types of business entities, let’s first review how we establish the best entity for your business. First and foremost we look at the type of business, the size of the business, and the location of the business. Once we have those details established we work with the business owner to understand how much they want to risk and how they want to file their taxes. For example, if a business is on the small side and the owner does not require a lot of liability protection (like a freelance graphic designer), a sole proprietorship might be the best option. Alternatively, if the company is larger than a handful of people, an LLC or S Corp might be a better option.
What Is A Sole Proprietorship?
A sole proprietorship is a good option for a business that does not require a lot of liability protection. Very often, sole proprietorships grow into LLCs (Limited Liability Corporations). While it sounds like a one-person show, a sole proprietorship can have employees, but it is important to remember that the business will need to pay income taxes.
What Is An LLC?
A Limited Liability Company means that business and personal assets are always separate. While it can certainly have one or more members involved in “ownership,” the members personal assets are usually protected from business creditors.
What Is An S-Corp?
S-Corps are considered a “pass-through entity” and not taxed directly -- rather the income reported on the owner’s personal tax returns is taxed. Owners of an S-Corp are able to better control self-employment taxes and possibly minimize those (versus an LLC).
As you can see, there are many things to think about and consider when selecting a business entity—and we haven’t even talked about the paperwork or the process involved in setting it up officially with the IRS. At Accountfully, we have the pleasure of working with business owners and helping them make smart decisions that will positively impact and support their business. Selecting the business entity is just one of the many ways we do that. If you are interested in learning more about business entities and whether or not your current entity is the best option for you, let us know. We are always happy to hop on a call and compare notes.