Partnership, LLC, C-Corp or S-Corp? A Guide to Protecting Your Business Assets

Posted by: Joseph Kuo | October 8, 2021

Choosing a business structure is an integral step.

Creating a business is an exciting venture, and choosing a business structure is an integral step. Not only is each business structure taxed differently, but they all offer different levels of protection between your personal and business liabilities. Before moving forward on your next step in entrepreneurship, make sure to understand the pros and cons of each business structure and how to best protect your assets.

Sole Proprietorship

Owned by a single person and easily established, a sole proprietorship provides no differentiation or protection between the personal and business assets of the owner.

Pros of Sole Proprietorship

Establishing and maintaining a sole proprietorship can be fairly easy to do, as business income is included in the owner’s personal income tax return. (As always, consult with a tax professional). In most jurisdictions, there is very little paperwork required other than a business license.

Cons of Sole Proprietorship

There is no additional legal protection with a Sole Proprietorship. With no protection and no separation between personal and business assets, owners become personally liable for their business’s financial obligations. Legal action against your personally can affect your business assets, and vice versa.

Best for?

Easy setup and direct control could make a sole proprietorship ideal for small business owners who can afford the financial risks. It’s also an option if you are just starting out, or trying out an idea. You can always convert to a more formal corporate structure later on.

Partnership

Similar to a sole proprietorship, though shared amongst two or more individuals, a partnership passes on business profits or losses to each partner, who then report their share onto their personal income tax return. Partnerships have many of the same advantages as a sole proprietorship, but risk towards personal assets is now shared.

Pros of Partnership

With a larger group, you can split up responsibilities and areas of expertise among the partners, and can get a larger operation going more quickly.

Cons of Partnership

Ownership of the business and its actions, and of course, all profits, are also shared, limiting individual control of the business. Partnership agreements can be very complicated in both ownership structure and control. You can still be held liable if legal action is taken against any of your your partners.

Best for?

Smaller groups of similar or complementary professionals looking for the advantages of a sole proprietorship, while sharing liability and business direction.

Limited Liability Company (LLC)

As the name suggests, an LLC reduces a business owner’s liability by creating a separation between personal and business assets. However, an LLC is taxed differently. Owners must pay self-employment taxes to Social Security and Medicare, but profits and losses can become personal income without facing corporate taxes.

Pros of a LLC

Unlike a sole proprietorship or partnership, an LLC provides owners with protection between personal and business assets.

Cons of a LLC

Only certain states allow LLCs, limiting the opportunity to create one depending on where your business operates. As the name implies, legal protection is not complete. In general, your personal assets are not protected if you personally commit wrongdoing or negligence in the course of operating your business.

Best for?

Businesses that are looking for most of the asset protection of a corporation with much lower taxes.

C-Corp

C-Corporations function as their own entity, offer the best personal liability protection to the owner and can raise money through the sale of stocks. However, C-Corporations also require more thorough recording and operations procedures, and income can be taxed more than once before reaching a shareholder.

Pros of a C-Corp

Full personal protection, the ability to generate capital through the sale of stocks and potential tax advantages gives C-Corporations the support to operate for years to come. The largest companies are almost all C-Corps.

Cons of a C-Corp

Significantly more paperwork is required, both in setting up the entity and yearly compliance. As a C-Corp, if you offer stocks, you will be under increased oversight from both the IRS and the SEC. C-Corps are taxed on their profits, which can then be taxed again as personal income tax when shareholders receive their dividends, effectively resulting in double-taxation.

Best for?

Great for the long-term growth and sustainability of a business, while protecting the owner from personal liability.

S-Corp

S-Corporations provide the same personal liability protection while operating with their own restrictions.

Pros of an S-Corp

Profits are passed through directly to shareholders, thus avoiding the double taxation that happens in a C-Corp.

Cons of an S-Corp

S-Corporations are not able to tap into some of the tax advantages of a C-Corporation and so may pay more corporate taxes. They are also limited to no more than 100 shareholders, all of which must be U.S. citizens.

Best for?

If the extra requirements are worth it, then businesses can gain most of the benefits of a C-Corporation while avoiding the double-tax issue.

Keeping this information in mind will help you determine the right business structure for you. But remember, this information is not meant to replace the personalized advice and recommendations you may receive when working with a financial advisor or tax professional. Make sure to consult a specialist before moving forward on your business plans.

Do you need help choosing the right kind of legal entity for your new business? Contact me by phone by email at joseph@abundancewp.com, or schedule a meeting by clicking the button below:

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