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What Company Structure?, Advantages disadvantages

Which Company type?

There are quite a few ways to start a business in New York. You can start your business as a Sole Proprietor, create a Partnership, or Incorporate. Though some of these options might seem confusing, we will give you information on the different company structures to help you choose the right one for you.

The type of company structure you will chose for your business depends on factors such as: riskyness of the industry, number of partners, financing requirements, taxation, long term vs. short term and others. We created a comparison chart below to illustrate the Pros and Cons of the different structures.

It is important that you consult with your accountant before making your choice, because she will be doing the tax filings and should feel comfortable with your choice of company structure. The more the accountant knows about the company structure, the more she can save on taxes and will be less likely to make a mistake.

Using a lawyer is not a requirement when starting your business; nonetheless it is recommended that you consult with your lawyer before forming your business.

Sole Propietorship

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

Partnership

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


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.

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.

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