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Benefits And Disadvantages Of Different Business Types

Anyone in the United States can start a business and make money doing it without establishing a legal entity, and operate as a sole proprietor...

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Anyone in the United States can start a business and make money doing it without establishing a legal entity, and operate as a sole proprietor. They can also take on a partner and call it a partnership. Both business types can also establish a DBA, also known as a fictitious business and operate under a business name as long as it is unique.

It is strongly advised that you form a business with a solid legal structure so that you can benefit from legal protections like keeping your personal assets when bad news arrives.

The most common business type is a Corporation

While a corporation can grow to a public company with millions of shareholders, it can also be owned, operated, and overseen by just one person. In this case, that person is the sole shareholder, director, and officer of the company. Many smaller corporations elect themselves as an S Corporation which allows the company to pass on all of its federal tax liabilities to the shareholders. Another form of such “pass-through” entities is an LLC (a Limited Liability Company). An LLC is similar to a corporation in that the shareholders, called members, in this case, are not liable for company debts but similar to a partnership in that it has more operating flexibility.

The Nonprofit

Another unique form of business entity is a Nonprofit. This doesn’t mean that the Nonprofit does not turn a profit, it means that the proceeds will remain in the organization as opposed to being paid out to shareholders. Nonprofit organizations are exempt from paying taxes on the money they earn.

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There are many ways of establishing a legal entity to conduct business in the United States. It is important to establish a legal entity in order to receive personal asset protection when running a business. Consult with your tax and legal advisors on which of the common business types is the right choice for what you have in mind. Below is a breakdown of all the main legal business types and their main characteristics:

C-Corporation

If you plan on having a lot of shareholders, a C-Corporation is your best option. C-corps are allowed to have unlimited shareholders, including foreign investors. The downside of a C-corp is double taxation. The Corporation has to pay taxes on its profits, while the shareholders have to also pay a capital gains tax on the distributions they receive, also known as dividends.

S-Corporation

If you plan on having less than 100 shareholders and do not care about investments from foreign entities, this is typically the best option for you. An S-Corporation is a C-corp whose board of directors has elected it to become an S-corp for tax purposes. An S-corp does not have to pay federal taxes on its profits, rather all the tax liability gets passed through to the shareholders equally based on their percentage of ownership. Due to this option, owners of an S-corp can usually pay a lower amount in overall taxes.

One caveat though, in a C-corp, shareholders can be personally exempt from paying the overdue taxes while in an S-Corp, shareholders have the responsibility to pay the taxes personally.

Limited Liability Company (LLC)

An LLC is similar to a Corporation as it provides a corporate shield to its shareholders, known as members, and has fewer restrictions and more flexibility of ownership than an S-corp. An LLC, for example, is not subjected to hold annual meetings or to keep corporate minutes. On the downside, LLC members will pay slightly higher overall taxes than if they were shareholders in an S-corp. 

Nonprofit Organization (NPO)

Nonprofit organizations can operate within certain verticals such as research or education space. Running a nonprofit involves more due diligence and the entity can be subjected to more rules as it is responsible for how it operates in relation to its donors, volunteers, beneficiaries, and the community.

The main benefit of a nonprofit is that while the revenues cannot be disbursed as income to founders, it is not responsible for paying income taxes and is allowed to keep the profits within the organization or spend it towards a charitable objective. Organizational leaders are entitled to receive a reasonable salary as compensation.

Actionable Steps


1

Incorporate

Incorporate your business online by following a few steps. This process usually starts with creating an Articles of Incorporation which will be filed with the Secretary of State.

2

File for an S-corp

Learn more about filing for an S-corp – a simple application using form 2553 – is sufficient for being recognized as an S-corp for IRS purposes.

3

Learn about Nonprofits

Learn more about setting up a Nonprofit organization. Whether now or in the future, if you want to create an organization to contribute to your community, you need to do your homework first, beginning with research to determine if your organization will be unique enough to stand out.

About the Author


Farbod Javaherchi

Farbod Javaherchi

CEO, Novia Marketing

Farbod is a serial entrepreneur having started 8 different companies in marketing, sales, and technology since graduating college. In 2015, he founded Novia Marketing, an innovative lead generation and full-service marketing agency. His clients have ranged from one-time data buyers to presidential candidates. He also owns a SAAS platform called SYNC Profiles for local businesses to help them gain better visibility online, manage their data across the Internet, and generate positive online reviews.
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