A Checklist for Selecting a Business Type
Business Organization Forms and a Business Form Selection Checklist
Business Organization Types
You may have heard people talk about “Sub-S” corporations, LLCs and PCs and their relative merits. You will need to decide which form of business is right for you based on criteria such as:
- Ease and cost of formation
- Administration and record keeping
- Liability, and more.
Brief Descriptions of Business Types
Here is a brief description of each form:
- Sole Proprietorship
- A sole proprietorship is a business run by an individual. The owner is the business; the owner has all of the profits and losses of the business. The owner also has all the control and all the liability from the business operations. Business taxes are paid by the owner through his or her personal income tax return.Read more about the sole proprietorship, including advantages and disadvantages and taxes.
- A partnership is a business which operates like a sole proprietorship, but with several individuals running it. The partners share the profits/losses, have control and liability for business operations. Partnership taxes are paid by the partners on their personal tax returns, in proportion to their share of ownership.
- Corporation (or C-Corporation)
- S-Corporation (or Subchapter-S Corporation)
- Limited Liability Company (LLC)
- A limited liability company is formed by "members" whose liability is limited to their investment. An LLC is often used in place of partnerships to limit liability while having the option of being taxed through the personal tax returns of the members. Here is more information on LLCs vs. Corporations.
The Business Type Checklist
Understanding the different business types is interesting, but it doesn't help you decide which type to select. Here are some factors to consider:
- Are you just starting your business? If so, you may want to select a simple type like a sole proprietorship. You can always change later.
- Are you working alone, with no employees? In this case, a sole proprietorship or single-member LLC might be the best option for you.
- Do you sell products which could be misused or subject you to liability? You probably want a corporate structure to shield your personal assets from the liabilities of the corporation.
- Are you working with other professionals in a group? A partnership or a multiple-member LLC might give you protection against liabilities and allow all members of the group to have a say in the day-to-day running of the business.