When developing the seeds of a new business venture, entrepreneurs must make a myriad of choices. One of the many choices that must be made is the selection of a business operational structure.
Choosing between a corporation, a limited liability company, a partnership or a sole proprietorship impacts many aspects of the business and requires careful evaluation before a final decision is made.
Taxes and so much more
Many people immediately focus on the tax ramifications from a business operational structure decision. However, as explained by Entrepreneur magazine, taxation is only one of the factors influenced by this decision. The type of business established directs the level of legal liability the owners may or may not be exposed to as well as many elements of how the business operates.
A traditional corporation, also referred to as a C corporation, protects owners from personal liability but also carries with it the most extensive administrative requirements. It may also impact how decisions can be made. A partnership or sole proprietorship fall on the other end of this spectrum but may not protect owners from legal action.
New tax law and the S corporation
Before the Tax Cuts and Jobs Act went into effect, many people rushed to establish S corporations instead of C corporations to avoid the high business tax rate. According to Forbes, even with the reduction in the corporate tax rate many types of businesses may still benefit from the S corporation designation.
When selecting an S corporation, a business truly just selects how it will be taxed. An LLC selection identifies taxation, decision making and more.