Looking to start a business, or perhaps you already own a business and with the new tax law considering whether you are set up with the right business entity?  Whether you’re navigating the internet or listening to your neighbor, it can quickly become a cornucopia of information. 

Your research of the various types of business entities bring up the possibility of sole proprietor, partnerships, Limited Liability Companies, C corporations, and S corporations.  If that wasn’t enough, the new tax law has created even more to digest.  It can leave you feeling so stuffed you need to undo the button of your pants; maybe the zipper too (go ahead, I won’t look).

Carving out the ideal business entity is based on the individual situation and the goals associated with each business.  Once you’ve established your goals, analyzing your business entity options can seem less confusing.  Turning to the ever-faithful listing of pros and cons is a perfect way to start.  Below are some of these advantages and disadvantages to help you start to baste in.

Sole Proprietorship

Advantages

  1. There are no additional tax forms to file as all business income is recognized on your individual tax return
  2. May be easily converted to another entity
  3. Lower startup costs
  4. Administration is less complicated

Disadvantages

  1. Unlimited personal liability
  2. Inability to income split (the business owner recognizes all the income rather than being able to transfer or share the income with a family member or business partner)
  3. Limited ability to attract investors
  4. Business dies with you

Partnerships

Advantages

  1. Special allocations are permitted
  2. Fewer formalities than a corporate structure
  3. Provides privacy to partners
  4. Easier for partners to utilize partnership losses

Disadvantages

  1. The liability of the general partner is not limited
  2. Partners are taxed currently on earnings even if the earnings are not distributed
  3. Ridged distribution rules

Limited Liability Companies

Advantages

  1. Limited liability to all members
  2. Single member LLC’s can elect to be taxed as an S corporation or a C corporation.
  3. Ability to make uneven distributions
  4. Limited annual formality requirements

Disadvantages

  1. Members that are nonresidents of California are taxed on the California sourced income
  2. Managers who are actively involved in the management of the LLC are subject to self-employment tax
  3. California statutes seriously restrict the types of business that may elect to form as LLCs

C Corporations

Advantages

  1. Ability to create several classes of stock
  2. Greater access to outside investment
  3. C corporations can elect a fiscal tax year

Disadvantages

  1. C Corporations are subject to double taxation
  2. Required use of the accrual method of accounting (except in the case of certain personal service corporations)
  3. Strict annual formality requirements
  4. Possible SEC regulation issues

S Corporations

Advantages

  1. One level of taxation
  2. The losses of an S corporation are currently deductible by the shareholders, so long as they have sufficient basis
  3. Possibility to avoid some self-employment tax

Disadvantage

  1. The maximum number of shareholders allowed is 100
  2. Shareholders must be citizens of the United States
  3. Shareholders must be individuals (certain exceptions for trusts)
  4. Limited to one class of stock
  5. There are restrictions on borrowings by S corporation shareholders from their qualified retirement plan

Don’t get roasted in your pilgrimage to determining your ideal business entity.  Call our office and set up an appointment today to assist you.  You’ll be thankful.