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Many entrepreneurs and aspiring business owners choose to form a limited liability company because it is among the most cost-effective and streamlined ways to get your company off the ground. Yet, several other business types may be worth considering. Each option has its advantages and setbacks but may be worth considering.
Sole Proprietorship
A sole proprietorship is the most simple method of business operation. In this case, an individual engages in business without establishing a formal organization. You may act as a sole proprietor under your name or a pseudonym; if the latter, you would need to submit “doing business as” or DBA paperwork to the state, county and sometimes municipal government.
The owner of a sole proprietorship reports business income and earnings on their personal tax returns. Be prepared to pay a self-employment tax, which as of 2023 is 15.3%. Unlike LLCs, sole proprietors take on all risks and have no liability protection. They also lack the flexibility to choose between operating as a pass-through business entity or as a corporation. A sole proprietorship may be a good starting point for an individual, but they might later consider creating a single-member LLC.
Partnership
A partnership is a business model established when two or more people join together to establish a for-profit company. You may choose to establish three types of partnerships: a general partnership, limited partnership or a limited liability partnership.
In a general partnership, everyone has complete control and equally unlimited liability. This differs from a limited partnership, where one member assumes complete control of the day-to-day operations and others have limited control and liability. With an LLP, all partners have limited liability. As with a partnership, you and your partner or partners may be able to operate under a DBA as long as you complete the necessary paperwork, although some states may require you to register your partnership.
A partnership does not pay income tax, as it is a “pass-through” entity. That means at tax time, each partner reports their share of the profits and losses on their returns.
Corporation
One can form and operate C, S, B, and closed corporations within the United States (depending on the state’s options). While LLCs provide various forms of flexibility, corporation structures are more rigid by comparison.
C-Corporations
A C-corporation, or C-corp, is the most general form of this business model. It is recognized as a separate tax-paying entity. Along with an LLC, there is some limited liability protection.
Corporation owners are known as shareholders, and the level of ownership is reflected in the percentage of company shares each person owns.
S-Corporations
S-corp and C-corp businesses primarily differ in how they are taxed. Unlike a standard corporation, an S-corp is treated as a “pass-through” entity exempt from federal income taxes. Instead, S-corp shareholders are taxed individually. With this model, it is possible for shareholders to cancel out profits with losses accumulated elsewhere.
B-Corporations
In more recent years, a growing number of companies have chosen to operate as B-corporations. B-corp formation means these businesses receive certification through a qualifying third party or state-level recognition of their ability to create social good. Often, this relates to employment, their local community or the environment.
B-corps stand apart from other corporations regarding mission and purpose; the person or group behind these entities prioritizes running them as ethically and transparently as possible. In some states, B-corps must submit annual benefits reports demonstrating their contributions to the public good to maintain their status.
Closed Corporations
Closed corporations lack a traditional corporate structure. Instead of publicly traded shares, the company is run by a private group of shareholders; no board of directors is required.
Nonprofit Organization
A nonprofit organization is an entity that exists for reasons wholly separate from income generation, and no part of the organization’s earnings may be distributed to members, officers or directors. These organizations may be classified in different forms; for example, you may set up a nonprofit corporation or partnership. Some common examples of nonprofits include churches, public schools, political organizations, volunteer services and labor unions.
One of the better-known benefits of operating a nonprofit is tax exemption status, but to maintain this, the organization must adhere to specific requirements. For instance, the IRS notes that such an entity can lose its tax-exempt status by actively taking steps to earn private income or through political lobbying behaviors.
Cooperative
A cooperative, or co-op, is a type of business owned and controlled by the people and uses its services to meet their needs. Cooperatives typically operate in the insurance, credit, healthcare, telephone, electric, housing, transportation, child care and utility industries. Farmers often use cooperatives to both market and process their crops and livestock.
According to the United States Department of Agriculture, as of 2022, more than 30,000 cooperatives currently operate within the country. They are thought to generate more than $650 billion annually.
Cooperatives are not tax-exempt entities; they are subject to real property, sales, employment and personal property taxation and taxes related to unemployment compensation, workers’ compensation, various utility services, etc.
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