Business Legal Structures Pros and Cons
Pros:
- Easy to start and manage
- Inexpensive
- No separate tax returns, business gains and loses are reported in your personal income tax returns
- Flexible to manage, it gives you complete control
- Business expenses and loses are tax deductible
Cons:
- Unlimited personal liability for business debts and lawsuits
- Illness can endanger your business
- Difficult to find investors
- May be at a disadvantage attracting employers who are looking for ownership in the business
Pros:
- Easy to set up
- The partners report their business share of gains and loses on their personal tax returns
- Partners have full authority of the business
- Business losses are tax deductible
- Partners can share the workload and contribute different ideas to the business
- More financial as well as intellectual resources for the business
CONS:
- Unlimited personal liability for general partners * Each partner have full authority to commit the business to a contract (with exceptions)
- Its difficult to remove an unproductive partner from the business
- Personal assets are at risk if the business goes bankrupt
- The partnership ends if a partner leaves, retires, or dies
Corporation
PROS:
- Owners liability is limited to the investment in the company
- Easier to get investors
- Ownership is transferable
- The organization does not end when a shareholder (owner) dies
- Easier to separate business functions into sub-divisions
- A corporation can deduct cost of benefits provided to employers or owners
CONS:
- Complex to set up, maintain and difficult to dissolve
- C-corporations are subject to double taxation
- Costly to set-up
- Stricter rules for operations than Partnerships and partnerships
- If set up as an S-corporation, your company cannot have subsidiaries
- Not as much control as you would have with a Partnership or partnership
S-Corporation
PROS:
- If you plan to sell your S corporation the taxable gain in the business can be less than if you set up your business as a regular corporation
- You can declare business losses in your income taxes with an S corporation, offsetting your tax liability
- You can minimize FICA and self-employment taxes. Shareholder’s profits are not taxed in this manner
- You can raise capital more easily than a sole proprietorship or partnership
- You have the limited liability protection without paying taxes as a corporation
CONS:
- S corporations cannot have more than one hundred shareholders * The company shareholder cannot deduct the cost of fringe benefits provided to employees who own more than 2% of the corporation
- A shareowner cannot deduct loses more than the amount invested in the company
- Each S corporation shareholder has to be at least a U.S. Permanent resident
- Profits and losses for an S corporation are proportional to each members investment into the business
- You must receive compensation before earnings are distributed to shareholders (you must pay the employment taxes) important when the shareholder is also the employee.
Limited Liability Company
PROS:
- Affords Limited Liability, The owners can only lose the amount invested in the company
- Is easier to manage than a S-Corporation and a C-corporation
- Formal Structure that is investment friendly
- The organization enjoys pass-through taxation (you pay taxes on your personal income) but you can elect for the LLC to be taxed as a corporation.
- Partners can divide profits not proportional to their investment in the company. Most LLC choose to divide profits proportionally.
CONS:
- If in a partnership, a partner has the authority to bind the partnership to a contract.
- The LLC dissolves if a partner leaves the organization, retires, or dies.
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