Ways to Organize your Business
The pros and cons of corporations, LLCs, partnerships, sole proprietorships, and more.
| Type | Advantages | Disadvantages |
| Sole Proprietorship | Simple and inexpensive to create and operateOwner reports profit or loss on his or her personal tax return | Owner personally liable for business debts |
| General Partnership | Simple and inexpensive to create and operateOwners (partners) report their share of profit or loss on their personal tax returns | Owners (partners) personally liable for business debts |
| Limited Partnership | Limited partners have limited personal liability for business debts as long as they don’t participate in managementGeneral partners can raise cash without involving outside investors in management of business | General partners personally liable for business debtsMore expensive to create than general partnershipSuitable mainly for companies that invest in real estate |
| Regular Corporation | Owners have limited personal liability for business debtsFringe benefits can be deducted as business expenseOwners can split corporate profit among owners and corporation, paying lower overall tax rate | More expensive to create than partnership or sole proprietorshipPaperwork can seem burdensome to some ownersSeparate taxable entity |
| S Corporation | Owners have limited personal liability for business debtsOwners report their share of corporate profit or loss on their personal tax returnsOwners can use corporate loss to offset income from other sources | More expensive to create than partnership or sole proprietorshipMore paperwork than for a limited liability company which offers similar advantagesIncome must be allocated to owners according to their ownership interestsFringe benefits limited for owners who own more than 2% of shares |
| Professional Corporation | Owners have no personal liability for malpractice of other owners | More expensive to create than partnership or sole proprietorshipPaperwork can seem burdensome to some ownersAll owners must belong to the same profession |
| Nonprofit Corporation | Corporation doesn’t pay income taxesContributions to charitable corporation are tax-deductibleFringe benefits can be deducted as business expense | Full tax advantages available only to groups organized for charitable, scientific, educational, literary or religious purposesProperty transferred to corporation stays there; if corporation ends, property must go to another nonprofit |
| Limited Liability Company | Owners have limited personal liability for business debts even if they participate in managementProfit and loss can be allocated differently than ownership interestsIRS rules now allow LLCs to choose between being taxed as partnership or corporation | More expensive to create than partnership or sole proprietorshipState laws for creating LLCs may not reflect latest federal tax changes |
| Professional Limited Liability Company | Same advantages as a regular limited liability companyGives state licensed professionals a way to enjoy those advantages | Same as for a regular limited liability companyMembers must all belong to the same profession |
| Limited Liability Partnership | Mostly of interest to partners in old line professions such as law, medicine and accountingOwners (partners) aren’t personally liable for the malpractice of other partnersOwners report their share of profit or loss on their personal tax returns | Unlike a limited liability company or a professional limited liability company, owners (partners) remain personally liable for many types of obligations owed to business creditors, lenders and landlordsNot available in all statesOften limited to a short list of professions |
Copyright Nolo.com. Reprinted with permission.
