All the way from ease of setup and liability protection, there's a lot to consider when designing your business structure. To help you choose the best option and avoid legal trouble in the long run, we've laid out the basics, advantages, and disadvantages of the 6 common forms business enterprise:

 

Sole Proprietorship

A sole proprietorship is a type of business structure that is operated and owned by one person in which there is no legal separation between the owner and the business. If someone is the only owner of a business or works as a freelancer under their name, they already have the status of a sole proprietor. 

Advantages

  • Simplest and easiest business structure to establish since it doesn't require any formal actions to start up
  • Owner is given full control over any changes or decisions made for the business

Disadvantages

  • Financial stress and burdens rest on owner's shoulders
  • Owner is liable for all debts and obligations of the business and work

Partnership

A partnership is a business entity with shared ownership between 2 or more people. All owners contribute to the business and share in the profits and losses of the company.

Advantages

  • Partnership incentives offer competitive employment benefits
  • Easy, low-cost establishment process
  • Each member is financially committed and invested into the success of the partnership

Disadvantages

  • Shared ownership means shared profits, even when there is unequal contribution
  • Liability is shared among owners and individually, making everyone liable to business debts and decisions made by other members

Limited Liability CO

An LLC, often called a "hybrid" business form, has the easy administration of a partnership with the protected liability of a corporation. It's grown in popularity for small business entities due to its simplicity and lack of burdensome formalities found in large corporations.

Advantages

  • Protects the owners and their personal assets from business liability, such as debt or lawsuits
  • Requires less registration paperwork and holds less restriction on the sharing of profits within the LLC

Disadvantages

  • The entire net income of an LLC is subjected to pay self-employment tax contributions towards Social Security and Medicare
  • No reliable legal guide for owner and managers to operate from

Cooperative

A cooperative is an association, business, or organization owned and controlled by its members. In this business structure, the owners are the ones using the benefits and services of the company.

Advantages

  • Democratic Structure allows it to serves its members needs
  • Less taxes (taxed only on the cooperative, not individual, level)

Disadvantages

  • Cannot operate effectively without the full reliance on participating members
  • Slower cash flow due to lack of interest from large investors

Corporation

A corporation is a complex business structure that is owned and controlled by its shareholders. Owners operate as a single entity, yet the corporation itself is held legally liable for all actions and debts of the business.

Advantages

  • Easily generate capital through stock sales
  • Corporation owners only pay taxes on profits paid in salaries, dividends, and bonuses
  • Draws in hard working, motivated employees due to competitive benefits and potential stock ownership

Disadvantages

  • Costly, risky, and time-consuming to establish
  • Without the proper legal assistance, a corporation creates a heavy burden of taxes and complicated paperwork for the owners

S Corporation

S corporations are a special type of business corporation that elect to pass corporate income, credit, and losses through their shareholders. This helps shareholders to avoid double taxation on the corporate income.

Advantages

  • Operates an independent life from shareholders
  • Convenient business expense tax credits

Disadvantages

  • Higher employment taxes due to shareholder compensation requirements
  • Requires a strict, often cumbersome, operational process

Whichever solution you think is right for you, we are here to assist you if you need it! There are complexities and details when setting up almost any business that you need to be aware of, or risk facing legal consequences down the road.

Photo via Flickr by Adam Singer

Contact Rogers & Moss for your free, no-risk, consultation.