Corporations, Non-Profits, and LLCs: A Look at Different Types of Businesses
After the inspiration strikes for a new start-up business, one of the first decisions you'll need to make is the type of business structure you'll use for your new company. The structure you should choose depends on the way you plan to operate your business, and it has a direct connection with how you'll pay taxes and with liabilities that will impact both you as the owner and the company itself. Every type of structure has pros and cons associated with it, so it's important to understand your options so you can choose the one that best fits your needs and your vision. Once you choose the structure that fits, you will incorporate it into your business plan.
What Is a C Corporation?
A business entity that is owned by shareholders is known as a C corporation. Shareholders elect a board of directors to oversee the management of the business. In turn, the board of directors must ensure that the decisions made benefit the corporation and the vision of the shareholders. The greatest benefit of operating a corporation is the limited liability for owners regarding company debts. This type of business may also have lower taxes due to its sharing of profits. Transfer of ownership is also a relatively simple process. On the downside, starting a corporation involves complicated paperwork, and it tends to be more expensive. Decision-making can also be a slower process due to the numerous people involved with a board of directors.
What Is an S Corporation?
An S corporation has a different financial process, distributing income among the shareholders for purposes of taxation. The single layer of taxation is an important benefit for shareholders of an S corporation. An S corporation does have some drawbacks, however. Laws governing S corporations are very complicated, often requiring the assistance of an accountant or attorney. Some stock restrictions also apply to S corporations, and shareholders and officers of the company are required to take a "reasonable" salary.
What Is a Nonprofit?
A nonprofit is an entity formed to benefit the public in some way. Private and community foundations can both fall under the nonprofit umbrella. Internal Revenue Code Section 501(c)(3) provides tax-exempt status for these organizations. Nonprofits have a wide array of missions, but most charitable nonprofits fall under the classification of being human service organizations. The tax-exempt status of nonprofits is a distinct advantage of this type of business structure, and the founders and directors of nonprofits also enjoy limited liability for business debts. Drawbacks include the large amount of paperwork necessary to launch and operate a nonprofit as well as high costs and ongoing public scrutiny regarding finances and expenditures.
What Is a Sole Proprietorship?
A sole proprietorship may be the simplest type of business you can create. With a sole proprietorship, a single person writes the business plan and then forms, owns, manages, and controls the business. This means that all profits come directly to you, but you are responsible for all losses. Advantages of a sole proprietorship include easy management, simple decision-making, and flexibility. Disadvantages include unlimited liability if the business has financial problems, and the owner must also pay personal income taxes on all net profits.
What Is a General Partnership?
A general partnership is a company that is owned by two or more people. With this type of business structure, the partners all contribute funds to start the company, and everyone is responsible for its management. Sometimes, partners work out an agreement where each person assumes specific roles within the company. General partnerships are easy to start; they often require less capital because multiple people contribute to the start-up costs. As with sole proprietorships, general partnerships involve unlimited liability for business debts. Sometimes, partnerships also run into trouble if partners don't work together effectively.
What Is an LLC?
A limited liability company, commonly called an LLC, is actually a combination of a partnership and a corporation operating as a separate legal entity. Members of an LLC have the same single taxation that partners in a partnership have. An LLC is appealing to many entrepreneurs because members have limited liability for business debts, and these companies don't require the complicated paperwork that corporations do. It can be more expensive to start an LLC than it would be to start a partnership or a sole proprietorship, though.