Most common ways to structure your business: Advantages and disadvantages. Part One
Below is a list of five of the most common business structures, along with some of the main advantages and disadvantages of each. This installment features the sole proprietorship, general partnership, limited partnership, c corporation and s corporation. The second installment will feature the five other most common business structures.
Sole Proprietorship
Advantages
- Easy to create and operate
- Inexpensive
- Single taxation: owner reports profits and losses on personal tax return
Disadvantages
- Owner is personally liable for all the debts of the business
General Partnership
Advantages
- Easy to create and operate
- Inexpensive
- Single taxation: owner reports profits and losses on personal tax return
Disadvantages
- Owners/Partners are personally liable for all debts of the business
Limited Partnership
Advantages
- Limited partners have limited liability for debts of the business if they do not participate in management of the business
Disadvantages
- General partners are personally liable for all the debts of the business
- More expensive to create than a general partnership
C Corporation
Advantages
- Owners have limited personal liability for all debts of the business
- Fringe benefits can be deducted as a business expense
- Owners can split profits amongst each other thereby limiting their overall tax rate
Disadvantages
- More expensive to create than a general partnership
- Paperwork can be burdensome
- Double taxation: the corporate profit is taxed and so is the income of the owners
S Corporation
Advantages
- Owners have limited personal liability for all debts of the business
- Owners report their share of corporate profit or loss on their personal tax returns
- Owners can use corporate loss to offset income from other sources
Disadvantages
- More expensive to create than a general partnership
- Paperwork can be burdensome
- Income must be allocated to owners according to their ownership [1]
[1] Fred S. Steingold, Legal Guide for Starting and Running a Small Business 5 (Betsy Simmons ed., Nolo 10th ed. 2008).
Comments are closed.