Starting and running a business can be an arduous process, and it can be even more so when you don’t know where to begin. If you want to start a new business or operate an existing one, you’ll need to choose between a limited liability company (LLC), corporation, and a partnership.
You might wonder which is best for your business, or whether it makes any difference. The truth is, it depends on your goals and the structure of your business. So, which type of corporation should you choose and why? Keep reading to learn more about the different types of corporations and their pros and cons.
What Is a Corporation?
A corporation is a privately owned business that is run as a separate entity from its owners (shareholders). The shareholders are collectively responsible for all debts and obligations of the business, and they share in any profits the business earns.
In the United States, corporations are regulated by the federal government. State governments also regulate some aspects of corporations, such as the maximum amount of debt a corporation can take on, and require separate filings with state authorities for many things, such as taxes and insurance.
Pro Forma Corporation
A pro forma (“for form”) corporation is a corporation that is used as a starting point for planning or for analyzing the financial impact of certain business decisions. It is not meant to be an actual business entity, but rather a model for how a business might work.
For example, a real estate developer might decide to list their land parcels on a pro forma basis to analyze their development feasibility. They would list their land and property under the name of a pro forma company so they could receive the benefits of owning property while paying taxes on only their income from the company.
Limited Liability Company (LLC)
An LLC is a hybrid entity that can function as both a corporation and a partnership. LLCs are often preferred to sole proprietorships or partnerships because they limit the personal liability of owners for the debts and obligations of the business.
Like a corporation, an LLC is legally distinct from its owners. It is a separate legal entity that can own property, sue or be sued, and incur debts.
Because of these benefits, many small businesses choose to incorporate as an LLC. However, there are a few downsides to consider. One issue is that if the business earns extremely high profits, it may be taxed as a corporation instead of an LLC. Also, if the business is sold, the new owners must complete the LLC’s tax-formalities, including filing an annual report.
A partnership is a mutual agreement between 2 or more people to jointly manage a business. Unlike a company, a partnership is not owned by one person; instead, it is owned by the people who participate in the partnership.
For example, two real estate developers might decide to form a partnership to pool their resources and pursue commercial real estate deals. They would contribute their land and finances to the partnership and receive a share of the profits, just as if they were owners of a corporation. In this way, the partnership is a more flexible structure than a corporation because all partners can participate in the management of the business.
There are many benefits to incorporating your business, but which type of entity to choose can be confusing. Luckily, the following distinctions can help you decide which type of company is best for your particular situation.
If you run a small, single-owner business that does not need to grow very large, a partnership may be the perfect vehicle for you. On the other hand, if you have several employees and are planning on expanding, a corporation may be a better choice. It’s also important to note that a corporation is not the only type of business entity; other forms, such as a sole proprietorship, exist as well.
The ideal business entity depends on a variety of factors, including the type of business you have, the activities you’ll be undertaking, and your revenue. For example, a corporation that sells vitamins may benefit from the increased regulatory oversight and public image that comes with being a corporate entity. At the same time, a sole proprietorship that sells the same products does not need the overhead of a corporate structure.
For more information about incorporating your business, contact an accountant or attorney.