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Small Business & Tax Attorney

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Starting A New Business: Navigating Entity Selection

So, you’ve decided to start your own business. This is so exciting! Now comes the hard part of trying to determine how you should structure your business. There are many options available, each with their own advantages and disadvantages. Let’s look at a summary of each of the entity types from the easiest to the most complex.

1.       Sole Proprietor

a.       Advantage

           i.      Simplest entity to create

                     ii.      No forms are required

                    iii.      Income flows directly onto the personal income tax return of individual

b.       Disadvantage

                     i.      No personal protection against business debts and obligations

2.       Limited Liability Company

a.       Advantage

                     i.      Fairly simple to form with Secretary of State

                    ii.      Limited liability for business debts and obligations

                   iii.      Income flows to personal income tax return of members

                   iv.      No limit on the number of members eligible to participate

b.       Disadvantage

i.      If more than one member then taxed as a partnership unless elect to be taxed as a corporation (including S Corporation)

                     ii.     May need an operating agreement if more than one member

3.       Limited Liability Partnership

a.       Advantage

                     i.      Limited liability for business debts and obligations

                     ii.     Income flows to personal income tax return of partners

                     iii.    No limit to number of partners who may participate

iv.    Fairly simple to form with Secretary of State

b.       Disadvantage

                     i.      Separate tax return required to be filed

                     ii.     May need a partnership agreement

4.       S Corporation

a.       Advantage

                     i.     Limited liability for business debts and obligations

                     ii.    Income flows to personal income tax return of shareholders

                     iii.   Different taxing implications for wages and dividends

iv.   Limitation of fringe benefits for more than a 2% shareholder

b.       Disadvantage

                     i.      Additional filing requirements with Secretary of State

                     ii.      Separate tax return required

                     iii.     Shareholders cannot be foreign nationals

                     iv.     Number of shareholders limited to 100 individuals

5.       C Corporation

a.       Advantage

                     i.      Limited liability for business debts and obligations

                     ii.     No limit to number of shareholder allowed

b.       Disadvantage

                     i.      Double Taxation

                     ii.      Additional filing requirements with Secretary of State

                     iii.     Separate tax return required

                     iv.     Potentially additional tax at the state level

If you are looking to start your new business and would like some insight into what legal entity may be most appropriate for your situation, please feel free to reach out to Robinson Legal and we would be happy to discuss your unique situation. #robinsonltd