Most common ways to structure your business: Advantages and disadvantages. Part One

David ManesUpdates

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).