The Difference Between Business Entities

When starting a new business, most people don’t know the benefits or disadvantages of filing as a corporation or an LLC.  If filing as a corporation, which is better - a “C” corp or subchapter “S”?  This article will clear up these questions and hopefully make your decision a little easier.

When you incorporate a business, the company operates as a separate entity, rather than the owner operating as a sole proprietor.   If someone sues a corporation, they won’t be able to seek a judgement of the owner’s assets unless a personal guarantee exists.  As a sole proprietor, the business owner is responsible for company liabilities and debt.  A corporation offers more protection.

Just like a sole proprietor, a partnership assumes all liabilities of the company but they are shared between two or more owners.  The distinction between a sole proprietor or partnership and a corporation is that the company is separate and apart from the owners in terms of liabilities.

There are some tax consequences to filing a business as a C corporation. An S corp (subchapter corporation) avoids this situation by allowing profits or losses to be accounted for on the owner’s individual tax returns.

A limited liability company (LLC) allows profits and losses to be passed through to owners without taxation of the business itself while also protecting the owners from personal liability.  A limited liability partnership (LLP) offers the same but to more than one stockholder.

As a business owner, protecting yourself against legal liabilities is very important.  At a time when many people try to make an easy buck by taking it from others who have it, being insulated from frivolous lawsuits is very important.  Taxation is also something every business owner has to take into consideration.  The government takes enough of our money so it’s important to take advantage of any benefits the law allows.

To make things extremely simple, S corporations and LLCs are the most popular choices for small businesses as they offer favorable tax advantages and protection from legal liabilities.  C corporations are usually for much larger companies.  Doing business as a sole proprietor or partnership have favorable tax advantages but leaves the owner(s) exposed to the possibility of having to settle the company’s debts.

A not-for-profit organization requires that the key personnel do not receive remuneration in the form of profit.  Some people are under the illusion that nonprofit organizations don’t make any money but that’s not necessarily true.  Most nonprofits just set the executive salaries high so the books come down to zero at the end of the year rather than the executives taking a distribution of financial surplus the way corporation owners do.

Not for profit organizations can also file for tax exempt status and can accept donations.  Some nonprofit organizations are charities or offer some type of community service.  Others use the nonprofit status as a public relations tool by of making people think that they are working out of the goodness of their hearts.  As mentioned above, key personnel can have overinflated salaries, just as long as the organization shows no profit at the end of the fiscal year.

For more information on how to file your startup, call Ashlar Consulting Corporation at 305-849-9399 or visit www.AshlarConsultingCorp.com.