Entity Selection and Restructuring CPA Boulder
Sole Proprietorship
A sole proprietorship is easy to form that gives the taxpayer complete control of the business. The taxpayer is automatically considered to be a sole proprietorship if they conduct business activities but don't register as any other kind of business with the state or IRS. Sole proprietorships are not a separate business entities, which means the business assets and liabilities are not separate from the taxpayer personally. The taxpayer can be held personally liable for the debts and obligations of the business. It is easy for sole proprietors get a trade name, but it can be difficult to raise money because you can't sell stock, and banks are hesitant to make loans to sole proprietorships. A sole proprietorship is a good choice for low risk business where the owners want to test their business idea before forming a more formal business.
Partnership
A partnership is the simplest structure for two or more people to run a business together. The 2 common kinds of partnerships are limited partnerships (LP) and limited liability partnerships (LLP). Limited partnerships have one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability usually have limited control over the company's operation, which is documented in a partnership agreement. Profits and losses are passed through to personal tax returns, where the general partner without limited liability must also pay self-employment taxes. The limited liability partnership is similar to limited partnerships, but give limited liability to every owner.
The limited liability partnership protects each partner from debts against the partnership and they will not be responsible for other partner's actions.
Limited Liability Company (LLC)
A limited liability company lets the taxpayer take advantage of the benefits of both the corporation and partnership business structures. LLCs protect the taxpayer from personal liability in many cases (personal assets like your home, cars, bank accounts, etc.), in the event the LLC faces lawsuits or bankruptcy.
Profits and losses are passed through as personal income without facing corporate taxes. Members of a limited liability company are considered self-employed and must pay self-employment tax contributions for Medicare and Social Security. In many states, limited liability companies have a limited life and when a member joins or leaves an LLC, some states can require the LLC to be dissolved and re-formed with the revised membership (unless the LLC already an agreement in place for buying, selling, and transferring ownership. Limited liability companies are a good choice for moderate to high risk businesses where the owners with a significant amount of personal assets want to be protected,
C-corporation
A C-corporation is a legal entity that is separately taxable from the owners/shareholders. Corporations offer the strongest protection to its owners from personal liability. However, the cost to form a corporation is much higher than other structures and also requires more extensive record-keeping, tax filings, and reporting requirements.. C-corporation profits are taxed twice, the first is when the company makes a profit and then again when dividends are paid to shareholders on their personal tax returns. The double taxation of profits is one downside to being organized as a C-corporation.
Corporations are completely separate from its shareholders and when a shareholder leaves the company or sells his or her shares, the C corporation can usually continue doing business undisturbed. A big advantage corporation have is when it comes to raising capital because they are able to raise funds through the sale of stock, which also can be very beneficial when attracting employees. Corporations can be a good choice for moderate to high risk businesses that need to raise money that possibly plan to "go public" or be sold in the future.
S-corporation
An S corporation is a specific type of corporation that is designed to avoid the double taxation drawback of regular C corporations. S-corporations allow profits and losses to be passed through directly to owner(s) personal income tax return without ever being subject to corporate tax rates.
S-corporations are not treated equally in all states, but almost all recognize them the same way the federal government does. A few states (NOT COLORADO...phew) tax S-corporations on profits above a specific limit, while some do not recognize the S-corporation election at all, essentially treating the business as a C-corporation. S corps must file with the IRS to get S corp status and are subject to other rules such as; no more than 100 shareholders, still have to follow strict filing and operational procedures of a C-corporation and all shareholders need to be U.S. citizens.
Similar to a C-corporation S-corporations also have an independent life, so if a shareholder leaves the company or sells their shares, the S-corporation can usually continue doing business undisturbed. An S-corporation may be a good choice for a business that would otherwise be a C-corporation, but meets the criteria to to file the S-election and wants to avoid double taxation.