One of the earliest steps in building your company is selecting the right kind of entity. Whether it’s a sole-proprietorship, LLC, C corporation, S corporation or other, there are pros and cons of each that might make them a good fit for your business or not. This can be a complex decision, and you should always seek advice from tax professional before moving forward.
In order to help familiarize new entrepreneurs with the different options for business entities, Guidant CEO, David Nilssen, details the most common entities that we see entrepreneurs consider.
No time for a quick video? Here’s the transcript:
David Nilssen: One of the first things that an entrepreneur needs to consider is what type of business entity they’re going to operate their new business in. Now, there are a lot of different options, and it’s important to use a tax professional in making that decision because there is no one size fits all opportunity here. The number of shareholders that are involved, the type of financing that you utilize and even the exit strategy are going to play a role in that decision process.
For today though, I want to do a quick overview of the most commonly considered entities that we see with entrepreneurs. The first is the sole proprietorship or sole prop. This is where you are not actually filing a business entity but instead just stating the profit or losses on your personal taxes at year end. It’s important to note though because there is no entity, you are taking on more risk in terms of liability.
And similarly, there is a partnership. This is basically the same thing as a sole proprietorship except for you’re splitting that profit or that loss for tax purposes, between one and more parties. But again it does carry the same sort of liability risk as the sole proprietorship does.
Then there is the corporation. These are more complicated to establish, but by incorporating you’re protecting your personal assets because it is a separate taxable entity and after you incorporate, you can choose to elect ‘S’ status. This will make the entity pass-through for tax purposes which means the shareholders are taxed instead of the corporation, but it still maintains liability protection. It’s really calm and for a tax professional to recommend this structure because it allows an entrepreneur to take those tax losses that they may expect especially is startup phase in the first years of when it actually happens as opposed to, if you have a C corporation you carry those losses for an offset future case.
Then finally there is the LLC. The LLC is slightly easier to establish and maintain than a corporation. But it maintains the same type of liability protection. These are preferred structures for say real estate, but not typically utilized for complex business structures — companies that are going to raise capital or go public.
The right entity will help you maximize your tax benefits while reducing your liability. So, consider them carefully and again use a tax professional when making that decision.