It is always important to be aware of legal issues so that you can take advantage of legal protection and avoid damages and extra fees.
Legal Forms of Organization
- Least Protected
- Sole Proprietor
- Partnership
- Bridges
- S-Corp
- LLC
- Most Protected
- C-Corp
- Non-profit
Sole Proprietor
- Advantages
- Easy and cheap to create
- 100% control and profit
- No information disclosure required
- Taxed at the individual level
- Disadvantages
- Unlimited liability for all claims against the business – important to get insurance
- Difficult to raise debt capital
- Survival of the business is 100% dependent on the owner
Partnership
- Advantages
- Sharing the risks of doing business
- Sharing expertise and ideas
- Taxed at the individual level
- Disadvantages
- Each partner is liable for the obligations of other partners
- Partnership dissolves when a partner leaves or dies
- An individual partner can be sued for the full amount of partnership debt
C-Corporation
- Advantages
- Limited liability
- Ownership is easily transferred
- May apply employment benefits
- More status and deference
- Disadvantages
- More expensive and complex to start
- Taxed on corporate income
- Giving up control
Non-Profit
- Advantages
- May qualify for tax-exempt status
- Attract corporate donors who can deduct donations as business expenses
- Can apply for grants from government agencies and private foundations
- Disadvantages
- Profit cannot be distributed as dividends
- Entrepreneurs give up proprietary interest in the company
- Must pay tax on the profits from unrelated activities
S-Corporation
- Advantages
- No double taxation
- Business losses to be passed through at individual level
- No self-employment taxes + distributions
- Disadvantages
- Have to pay taxes on profit including planned retaining earnings
- Must be able to generate enough cash to pay the tax
Limited Liability Company (LLC)
- Advantages
- No double taxation – an LLC can choose to be taxed as an S-Corp or a C-Corp
- Better than a limited partnership – limited liability + management right
- unlimited # of members + may have foreign investors
- Disadvantages
- May have too many managers
- Pay more tax than S-Corp