Is Your Business Identity Making You the Most Money?

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Did you know that how you file your business identity could have a huge impact on your ability to make money?  I certainly didn’t know until I took the time to read through each of the entities and devise a list of pros and cons for each one.  Luckily for you, you won’t have to read through hundreds of pages of legal documentation (Yuck!), because I am going to save you hours of toiling over unnecessary legal jibber jabber and give you a shortcut to understanding your business entity.

1.  Sole Proprietors

Pros

  • Easy to start
  • No fees required to create your company
  • Your net business losses can be deducted from your personal taxes

Cons

  • You are personally liable for debts and other liabilities
  • You pay personal income taxes on the net profits your business generates

If you are a sole proprietor I want to give you a pat on the back, congratulations on taking the leap and becoming you own boss.  This is the first and simplest business identity, it is run by one person who is the owner of the establishment.  It is a viable option for many businesses including restaurants and retail, but also commonly used by service orientated industries and freelancers.

2. General Partnerships

Pros

  • Easy to start
  • No fees required to create your business
  • Your net business losses can be deducted from your personal taxes

Cons

  • You are personally liable for debts and other liabilities
  • You pay personal income taxes on the net profits your business generates

General partnerships are very similar to sole proprietors except instead of a individual owner, there are two or more partners.  All partners share equal responsibility for any debts or liabilities the company runs into.

3.  Limited Partnerships

Pros

  • Relatively easy to find investors because they will have limited liability
  • General partners are able to get the money they need while maintaining full authority of business operations
  • Limited partners can leave without dissolving the partnership

Cons

  • General partners still have full liability for debt
  • More expensive to start up than general partnerships

Like general partnerships they consist of 2 or more individuals, however within the partnership there are limited partners.  These partners don’t have any control over the business operation and primarily act as investors.  Its a good idea to form any real estate investments as Limited Partnerships.

4.  Corporations

Pros

  • Owner has limited responsibility for debts and other liabilities.
  • Benefits can be deducted as business expenses
  • Taxes may be lowered when the owners and their business share profits

Cons

  • Usually more expensive to start up
  • Complicated legal paperwork must be completely and approved by your respective state
  • The business has a separate tax ID on which you must pay separate taxes

If your company is a Corporation, it is viewed legally as an independent entity that exists separately from you.  Your corporation is subject to more regulations and tax laws however, God forbid, if your business were to tank you are protected legally from personal bankruptcy.

5. S-Corporations

Pros

  • Owner has limited responsibility for debts and other liabilities
  • Owners can share net profits or losses and report them on their personal income

Cons

  • Can be more expensive to start up
  • Ownership determines how much personal income is earned or lost

Business owners may choose S-Corporations over Corporations because of its business structure.  The S-Corporation is able to pass on its profits or losses onto its shareholders.

6.  Limited Liability Company (LLC)

Pros

  • Owner has limited responsibility of debt and other liabilities, but they have full control of the business.
  • Ownership interest has little or no effect on how profits and losses are distributed
  • Owners can choose whether to be taxed as a corporation or partnership

Cons

  • Expensive to start up

These are hybrid business entities that tries to blend the best of partnerships with the benefits of corporations.  They give owners full control while still limited their liabilities.