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Loading ...There are several types of legal entities to choose from for starting a business. Each legal entity has its advantages and disadvantages but generally, a limited liability corporation (LLC) is the best option when starting a new company. However, it is important to compare the advantages and disadvantages of each legal entity before making a final decision.
Types of Legal Entities
Some of the positives and negatives of each legal type are listed below. Here’s a summary table explaining the positives and negatives of each legal entity side by side.
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C-Corporation
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Positives - shields owners from personal liability
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Negatives - double taxation of profits (both shareholders and corporation), profits distributed according to stock ownership, must use accrual method of accounting, must hold annual meetings, officers must be appointed
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S-Corporation - very similar to C-Corporation. It’s really only a tax election only.
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Positives - shields owners from personal liability, only salary received by employee owner is subject to 15.3% employment tax
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Negatives - double taxation of profits (both shareholders and corporation), profits distributed according to stock ownership, must use accrual method of accounting, cannot have more than 75 shareholders
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Limited Liability Company (LLC)
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Positives - shields owners from personal liability, allows distribution of profits regardless of stock ownership percentages, allows the use of cash method of accounting,
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Negatives - entire net income subject to 15.3% employment tax
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Sole Proprietorship
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Positives - easiest to maintain, allows for use of cash method of accounting
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Negatives - personally liable for debts of company, some employee benefits are not deductible from business income, profits must be distributed to owner
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Partnerships
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Positives - easier to maintain, allows for use of cash method of accounting
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Negatives - each 0wner is personally liable for total debts of company, some employee benefits are not deductible from business income, profits must be distributed according to ownership percentages
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Types of Accounting Methods
The two main types of accounting methods are (i) the cash method and (ii) the accrual method. On your tax return you must use the same accounting method you used to keep your records.
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Cash Method - a business reports all income in the year it is receives it and only deducts expenses in the year the business pays them.
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Accrual Method - a business reports income in the year it earns it despite when payment is received and deducts expenses in the year the business incurs them, regardless of when the business actually makes payment.
Businesses that have inventory must generally use the accrual method. In addition, companies that have greater than $5 million in gross revenue usually are required to use the accrual method.
