Which Business Entity is Right for You?

There are many things you have to think about when starting a new business—from getting funded to figuring out who to work with. But first, you will need to choose a business structure. There are several options, and each comes with its own set of advantages. So, in order to make sure you’re able to optimize your business to the fullest, review our list below to learn about some of the main options available and whether they’re right for your business.

C-Corporation

C-Corporations (C-Corp) provide the most flexibility in terms of raising funds. You can issue an unlimited amount of shares to an unlimited number of investors. However, C-Corps have double-taxation. This means that it has separate legal and tax structures so you are taxed twice on the same income. This may be unattractive, especially for those looking to keep their businesses on the smaller side. But, if you’re looking to grow your business, to the point where you might even want to take it public, a C-Corp is a great fit for you.

S-Corporation

S-Corporations (S-Corp), or Small Business Corporations, have a different structure than C-Corps. In an S-Corp, money flows through the entity straight to its owners who are taxed. Since the owners are taxed and the entity is not, the S-Corp avoids double-taxation. S-Corps can also issue stock to raise capital, but they are more restricted than a C-Corp. For instance, you can only have up to 100 shareholders and they all must be US citizens or permanent residents. Although you aren’t able to grow at the same scale as a C-Corp, the S-Corp allows you the benefit of corporation formation while being taxed like a partnership.

Limited Liability Company

The Limited Liability Company (LLC) is the most flexible and arguably most favorable of all the entities. With an LLC, every investor is only liable for the total amount they invested. Further, all limited partners enjoy limited liability for all of their debts, meaning they are shielded from personal liability. A few pitfalls are that you can’t go public and, if you’re a general partner in an LLC, then you are jointly and severally liable for any debts or other liabilities that may exist with the business. This means that general partners can be held personally liable for all losses or liabilities held against the company or another general partner acting in the regular course of the business. However, like an S-Corp, the LLC itself is not taxed. Therefore, LLC members avoid double-taxation while retaining the benefit of limited liability.

General Partnership

General Partnerships (GPs) are easy to create in that there are no fees or forms associated with forming one. Further, owners all share equally in profits and losses and may even report losses on personal income taxes. But, each general partner must pay personal income taxes on all profits derived from the GP. For their ease, GPs are very attractive to those looking to start a small business with trusted partners. However, a disadvantage is that all partners are jointly and severally liable for any debts or liabilities on the GP itself.

Limited Partnership

In a Limited Partnership (LP), there are both general and limited partners. However, limited partners enjoy limited liability from debts, judgments, and liabilities against the business—unlike the general partners who remain jointly and severally liable just like in a GP. Further, limited partners are only liable for the amount they invested and can leave the LP without having it dissolve. Therefore, the LP is also an attractive option for small business owners because it affords additional protections to more of its members.

Sole Proprietor

A sole proprietorship (SP) is the simplest structure. They are very easy to set up and maintain since the owner and the business are legally the same entity. The owner runs the business and is responsible for all transactions and liabilities that result. All income and losses are accounted for on the owner’s personal tax returns, but since the owner and business are one and the same, there are no additional corporate tax payments to speak of. Therefore, if you are planning to run your business alone, the SP may be right for you.

Regardless of which entity you ultimately choose, it is prudent to reach out to an attorney with experience in business law in order to help you make the decisions that are the best fit for you. Not only is choosing the type of entity a big decision, but many states, including Illinois, also impose their own set of requirements on business owners prior to, during, and after incorporation.

Experienced business law attorneys to help set up your business.

At Lake Cook Law, we take pride in helping our business clients form and grow their companies. For more information on how we can help you choose the best path for your new business, visit us at www.lakecooklaw.com or call us at (847) 387-5559.

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Written by Lake Cook Legal Solutions, LLC

Lake Cook Legal Solutions, LLC

Lake Cook Legal Solutions has been helping people throughout Lake, Cook, McHenry, and DuPage counties since 2012. We focus our practice on matters involving Illinois families—namely Family Law and Estate Planning.