Four Types of Business Entities: Which is Right for You?
You have a great business idea and want to form a legal entity to protect you and your business in the future. Or maybe you already have a business, but you’re not sure if you’re using the most advantageous entity type. Your options can vary dramatically and, depending on the entity you choose, you will be granted different advantages and disadvantages; which one is best for you? Will you have limited liability? Will you have to pay taxes on the business’s income or will the company’s net income pass through to you? How much legal protection will your assets have? Here are four common business entity types to help answer these questions.
If two or more people decide to start a business then it is considered a joint venture. Joint ventures are easy to form and are not required to pay annual fees to do business in Arizona. Partners in a joint venture have unlimited liability for the business’s debts and can be forced to use personal assets to cover them. A joint venture has the advantage over corporations of not paying corporate taxes, instead passing profit onto the partners’ personal income tax returns.
Limited Liability Company (LLC)
Limited liability companies are commonly chosen entities because they are simple and flexible. They allow for pass-through taxes, which are meant to reduce the effects of double taxation on both corporate and personal income. LLCs don’t pay corporate taxes, allowing owners to share the net profit (or loss) and report it on their individual tax returns. As the name implies, owners only have limited liability for business debts, equal to their initial investment into the company. This means that you typically can’t lose any more than what you put into an LLC. Additionally, the assets of an LLC cannot be taken to pay off an individual investor’s debts.
Limited Liability Partnership (LLP)
Like LLCs, limited liability partnerships also allow for pass-through taxes. The major difference between these two entities is that LLPs cannot have corporations as owners. This means that LLPs must have a managing partner who is liable for the partnership’s debts and losses. Other partners are not liable for the company’s actions or the actions of other partners, so for these partners, the structure is very similar to that of LLCs.
Corporations: C and S
C corporations are a standard type of corporation, while S corporations must follow specific guidelines in order to earn their status. Both types have limited liability protection, are separate legal entities that must be filed with the state, and have owners that they call shareholders. The main difference between these two corporation types is their taxation structure. C corps are separate taxable entities that are susceptible to double taxation, while S corps have a pass-through tax system. S corporations are also limited to no more than 100 shareholders and have restrictions on the class of their stock. Overall, while S corporations have many immediate advantages, C corporations may be a better option if you are planning for long-term growth.
Contact an Attorney About Business Formation
Before deciding what’s best for your business, you should speak with an experienced legal professional. At Russo, Russo & Slania, P.C., our knowledgeable corporate attorneys will work with you to develop the best plan for you and your business. We can help you navigate the complex process of Arizona business entity formation to ensure that you and your business are legally protected. Please contact our Tuscon offices at (520) 529-1515 to speak with one of our attorneys today.