Business Entities Comparison

Commonly Used Business Entities

Business Entities and which type best suits your needs will depend on current financial status, goals for the business, your willingness to take on risk, along with other factors. It is important to consult with an attorney, Certified Public Accountant (CPA), or tax adviser prior to setting up an entity to understand the legal obligations to a business.

The following is an overview of different Business Entities:

Sole Proprietors

Do you need to incorporate to start a business as a resident of the U.S.? No. You can begin as a Sole Proprietor and conduct business making sure you comply with the legal requirements of your city or state. Just file a Schedule C on your personal tax returns to report business income and expenses. Sole proprietors are individuals who operate their business on a totally personal level for both liability and tax purposes. The sole proprietor assumes greater liability and, as a “Business Entity”,  is afforded none of the legal protections that Corporations have in place.  Take into consideration that there is no legal protection for personal assets as a sole proprietor. If a worker is hurt, your personal assets can be in jeopardy. Taxes are paid at the individual rate, but the Sole Proprietor is limited in the number of eligible expenses incurred compared to the other business entities.

Employee Identification Number (EIN) Application

At the very least an EIN should be obtained and used for accounting purposes to keep business income and expenses separate from personal income and expenses. Also, many companies require an EIN in order to purchase product for resale or to be an affiliate marketer. When applying for an EIN use a general name as a catch-all for any of your internet businesses. In other words, if your internet company sells dog collars, consider having your EIN with your last name and Enterprises (Smith Enterprises). Then when you decide to sell woman’s jewelry under a different domain name such as BestJewels.com, it does not confuse the customer when records show that Best Dog Collars sold her the jewelry. To change a sole proprietor EIN name or call the IRS.

Partnerships

Partnerships are business entities with two or more individuals (minimal regulations). Partnerships are not given the legal protections that Corporations or S-Corporations enjoy, and the Partners have unlimited individual liability under the law. Partnerships are also terminated upon the death or withdrawal of any partner. Income from a partnership is taxed at the individual rate for each partner’s share of the earnings. Partnerships also give the ability to have General Partners, who control the day-to-day operations of the Partnership, and Limited (or Silent) Partners who only invest funds in the Partnership; they are limited in liability to the amount of their investment.

Limited Liability Companies (LLC)

LLC’s are easily created to provide legal protection for the members (rather than shareholders) of the LLC. They distribute income to the members on an individual level and income is taxed only once. Members are not issued shares for their interest in the LLC as in a Corporation; instead, a percentage of the total is recorded on the books for distribution of income. LLC’s differ from Corporations in that they have a limited life and cannot continue into perpetuity.

Corporations

Typical use for a Corporation is one where the owners desire to create a business entity that can last in perpetuity, issue shares to stockholders, sell or trade shares easily, have the option to publicly trade shares, can raise larger amounts of capital by issuing stock, limit liability of individual shareholders, and have the ability to have professional management of the business. Disadvantages include income being taxed twice, once at the corporate level and again as dividends are paid to shareholders, governmental influence and interference, control and decision-making capabilities are hindered by the desires of all shareholders, and publicly-traded corporations have much stricter reporting requirements by law.

S-Corporations

S-Corporations have all the legal protections described in Corporations, although they are intended to be “closely held” with a number of shareholders limited by law. They are so named due to an election made, by shareholders, immediately after the organization is created; similar to a partnership, distribution of income, to the shareholders, is reported on their individual income tax returns. The S-Corporation’s income is taxed only once, and usually at more favorable rates than a Corporation. S-Corporation’s may elect to change their structure to a Corporation, but cannot elect to return to the prior status. Being “closely-held”, they are popular with real estate investors who seek control of the S-Corporation, want to limit stock ownership and transfer, and want to avoid the problems associated with public reporting and disclosure. Often, real estate investors will use an S-Corporation for a management or service company to protect their assets in the business entity while enjoying tax advantages over a standard Corporation.

Business Entities-State and Local Information

State Identification Number

States may assign you an identification or account number for various reasons. The usual are: corporation number, employer account number, certificate numbers for specific licenses. Check with your State and Local Government.

Business License | Permit

Most cities and counties require businesses to have business licenses. You may not need one for a home based business but some states require licenses or certification to engage in certain types of businesses or professions, such as contractors, real estate agents, beauticians, optometrists. Permits are required for particular actions, such as construction, building permits, and permits for special events. Check with your local city and county governments.

Resale License

A resale license enables a company to purchase goods or materials for manufacture or resale without paying sales tax. Each state has its own requirements and terminology. Check with your local city, county, and state governments.

Fictitious Business Statement

If you use any name other than your own name, you’ll need to file a “doing business as” or fictitious business statement, usually with your county government and publish this information in the newspaper.

Questions To Ask When Hiring Someone To Set-up A Business Entity

  • Does cost of set-up include all filing fees, mailing costs, the filing of all necessary State and IRS Forms in order to form the entity?
  • What does it cost for your company to file annual and bi-annual state and federal fees? (this is an alternative to filing documents yourself.)
  • Should the company fail, what debts are incurred personally?
  • As an officer, am I personally liable for payroll taxes if the company should fail?

 

Render unto Caesar the things which are Caesar’s…

Many “Experts” say that setting up an entity in another state to save taxes is a prudent decision, yet be aware that each state wants money that is owed to them; this could come back to bite you in the behind (your wallet.)

Do not commingle personal and business funds, otherwise the corporate veil has been pierced and potentially puts personal assets in jeopardy.

Again, prior to setting up a business entity it is wise to consult with an attorney, certified public accountant (CPA), or tax adviser to understand the tax burden and legal obligations that a company will or may incur.


Weintraub Law Group can be contacted for more information or to Setup a Business Entity.

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Leave A Reply (2 comments so far)


  1. John
    6 years ago

    Thanks for the information… appreciated… been reading for awhile, and just had to tell you I continue to love your writing.

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  2. Amory
    6 years ago

    Short, sweet, to the point, FREE, exactly as information should be!

    [Reply]