If you or one of your employees causes injury or damage to a person or property during a business activity, are you personally liable? And will you lose your house or savings? Are you paying income taxes that you could perhaps avoid? The answers to these and other critical questions depend on how you’ve set up your company’s ownership structure.
That’s why it is important to decide early on how your business’s ownership structure will be set up.
There are many types of business ownership. Here are the most common:
- Sole proprietorship
- Limited Liability Company (LLC)
The choice is yours, but it cannot be overstated that it should be made early and with careful deliberation. Your decision will have an impact across your business, including taxes, liability, ownership succession, and many other factors.
Pros & Cons
There are pros and cons to each type of ownership. Here are just a few examples.
Sole proprietorship. This is the simplest form of ownership to set up. However, you will still have to follow local business registration, license, and permit regulations.
Advantages. Easy start up. Subject to fewer federal regulations. No corporate taxes. Full decision-making power. Ownership of all business income and assets. Easy to dissolve.
Disadvantages. More difficult to raise capital. Unlimited personal responsibility for paying income taxes and business-related debts.
Partnership. Going it alone is nice, but sometimes you need a partner or two, someone to share the investment costs or workload, or to provide expertise in areas where you may be lacking. Just be sure the partnership agreement is spelled out in writing, reviewed by an attorney, and formally registered or notarized.
Advantages. Easy set up. Proportionally shared taxation, liabilities, responsibilities and workload. Avoids the hassles of corporation/LLC filings.
Disadvantages. Shared profits. Possible disagreements between partners. Owners/partners liable to lawsuits and debts. Taxation issues similar to sole proprietorships.
Corporation. Forming a corporation allows you to set up your business as a legal entity that is separate from you as a person.
Advantages. Generally, little or no liability for damages or debts regarding the corporation. Reduction or elimination of certain income taxes.
Disadvantages. Operating control relinquished to board of directors or shareholders. More frequent and complicated tax filings.
Limited Liability Company (LLC). This ownership strategy blends various characteristics of a corporation, a partnership and a sole proprietorship – advantages as well as disadvantages. It is typically more flexible than a corporation and it is well-suited for companies with a single owner.
Advantages. Flexible taxation regulations. Limited liability for some or all acts and debts of the company.
Disadvantages. May be more difficult to raise financial capital. Some states (including Pennsylvania) levy franchise or capital values taxes on LLCs. Renewal fees may be high.
While self-directed research can be productive, we recommend consulting a professional when determining your ownership structure.
Accountants, tax preparers, lawyers and financial advisors can be helpful in this area; just remember that there may be consulting fees involved. And don’t overlook the fact that some choices involve additional paperwork and tax filings that may increase your overall business costs without adding cost-effective advantages.
A helpful booklet, An Entrepreneurs Guide to Starting a Business in Pennsylvania is available from the State of Pennsylvania, and includes a chapter about ownership structures.