Thanks for stopping by the blog! Today I want to take a few minutes and go over the pros and cons of two types of business entities I think most young, entrepreneurs can, and should be familiar with. There are multiple types of entities available for your business and if you plan on taking your company public at some point in its lifetime, you may want to know something about different corporations such as S corps or C corporations, so check back soon for a post or two on those!
But for now, lets get into the two most common types of entities utilized today.
Sole Proprietorship
A sole proprietorship is the simplest form of business. It is in fact the default form that you will have if a person begins conducting business without taking any steps to form a recognized business entity.
I am sure that sounds easy right? You do not have to take any steps whatsoever to conduct business as a sole proprietor. There are some pros to this form of business.
PROS: The cost of forming a sole proprietorship is $0. There is no tax liability when transferring assets between the business and the owner because the business and the owner are one and the same, so legally no transfer occurs. As far as I know, these are the two largest pros to running your business as a sole proprietor.
So what about the cons?
CONS: Sole Proprietorships are generally disfavored for quite a few reasons. The owner and the business are treated as the same. This simply means that the owner of the business will personally take on all risks of the business without any legal protections that other business entities enjoy. This means creditors of a Sole Proprietorship can pursue collection against both the business assets and the business owner’s personal assets. Sounds scary right? As an attorney, I prefer not to see businesses run as sole proprietorships for any longer than they have to.
That said, what is another option that might work for you?
Limited Liability Company or LLC
This is likley the most popular entity type for young budding businesses.
Currently most states if not all, allow for single owner LLCs which makes them very popular for young entrepreneurs.
Generally, if you follow your State’s guidelines for setting up an LLC, you and all members of the LLC are shielded from personal liability for the debts and obligations of your business.
An LLC is formed by filing Articles of Organization with the Secretary of State. The Operating Agreement will control the internal workings of the LLC and the relationships between members.
So what are the pros and cons of forming an LLC?
PROS: An LLC is relatively inexpensive to form (this will vary based on what state you are in) Each member of the LLC is free of any personal liability for the debts and obligations of the business. It provides significant flexibility in that members can agree on how to share profits, losses, and management of the company in whatever way desired. Also, LLC’s enjoy pass through taxation therefore it will not be taxed twice like many corporations. What exactly does that mean? It is simple. The tax implications of an LLC differ from those of a corporation in that an LLC does not pay taxes itself. The income from the business is instead passed down to the company’s owners or members who then claim the profits or losses on their personal tax forms. In a corporation, the corporation itself is taxed and the owners/members are also taxed personally. This makes it an attractive entity for a smaller business, or one that is not owned by a large number of people.
CONS: An LLC may not be right for your business if you plan to find investors, or a public stock offering is likely at any point in your companies life. A corporation may also be preferred if a more complex business structure is required by your type of business.
As I said in the beginning these are simply two types of business entities that may work for you and your business. If you have further questions specific to your situation, please feel free to reach out through the contact form on my website! Happy building entrepreneurs!
Please note: This is not meant to be legal advice, nor is this to be taken as creating an attorney client relationship. This article is simply for your legal knowledge. Shannon is licensed in the state of Florida and rules for business entities may vary based on your geographic region.