LLC, C-Corp or S-Corp? A Guide to Protecting Your Business Assets

Creating a business is an exciting venture, and choosing a business structure is an integral step. Not only is each business structure taxed differently, but they all offer different levels of protection between personal and business liabilities. Before moving forward on your next step in entrepreneurship, make sure to understand the pros and cons of each business structure and how to protect your assets.  

Sole Proprietorship

A sole proprietorship is easily established and owned by a single person. It does not differentiate or protect the owner's personal and business assets. 

Pros of Sole Proprietorship

Establishing and maintaining a sole proprietorship can be easy, as business income is included in the owner’s tax return.

Cons of Sole Proprietorship

With no protection between personal and business assets, owners become personally liable for their business’s financial obligations. 

Best for?

Easy setup and direct control could make a sole proprietorship ideal for small business owners who can afford the financial risks.

Partnership

Like a sole proprietorship, though shared amongst two or more individuals, a partnership passes on business profits or losses to each partner, who then reports their share onto their personal income tax return.3

Pros of Partnership

Partnerships have many of the same advantages as a sole proprietorship, but risk towards personal assets is now shared. 

Cons of Partnership

Ownership of the business and its actions are also shared, limiting individual control of the business. 

Best for?

Smaller groups of similar or complementary professionals looking for the advantages of a sole proprietorship while sharing liability and business direction.  

Limited Liability Company (LLC)

As the name suggests, an LLC reduces a business owner's liability by separating personal and business assets.4  However, an LLC is taxed differently. Owners must pay self-employment taxes to Social Security and Medicare, but profits and losses can become personal income without facing corporate taxes.1

Pros of LLC

Unlike a sole proprietorship or partnership, an LLC provides owners with protection between personal and business assets. 

Cons of LLC

Only certain states allow LLCs, limiting the opportunity to create one depending on where your business operates.4 

Best for?

Businesses looking for similar asset protection to a corporation without the same taxes.

C-Corp

C-Corporations function as their own entity, offer the best personal liability protection to the owner, and can raise money by selling stocks.1 However, C-Corporations also require more thorough recording and operations procedures, and income can be taxed more than once before reaching a shareholder.1

Pros of C-Corp

Full personal protection, the ability to generate funds through the sale of stocks and potential tax advantages give C-Corporations the support to operate for years to

come. 

Cons of C-Corp

C-Corps are taxed on their profits, which can then be taxed again as personal income tax when shareholders receive their dividends, resulting in a double-taxing.1

Best for?

Great for a business's long-term growth and sustainability while protecting the owner from personal liability.

S-Corp

Offsetting the often double tax of C-corporations, S-corporations provide the same personal liability protection while operating with their own restrictions. 

Pros of S-Corp

Owners can enjoy the liability protection of a C-Corporation without the same double-tax issues. 

Cons of S-Corp

S-Corporations cannot tap into some of the tax advantages of a C-Corporation and must have no more than 100 shareholders, all of whom must be U.S. citizens. 

Best for?

If the extra requirements are worth it, businesses can benefit from a C-Corporation while avoiding the double-tax issue. 

Keeping this information in mind will help you determine the right business structure. But remember, this information is not meant to replace the personalized advice and recommendations you may receive when working with a financial advisor or tax professional. Make sure to consult a specialist before moving forward on your business plans.

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