Most common ways to structure your business: Advantages and disadvantages. Part One

Below is a list of five of the most common business structures, along with some of the main advantages and disadvantages of each. This installment features the sole proprietorship, general partnership, limited partnership, c corporation and s corporation. The second installment will feature the five other most common business structures.

Sole Proprietorship

Advantages

1. Easy to create and operate

2. Inexpensive

3. Single taxation: owner reports profits and losses on personal tax return

Disadvantages

1. Owner is personally liable for all the debts of the business

General Partnership

Advantages

1. Easy to create and operate

2. Inexpensive

3. Single taxation: owner reports profits and losses on personal tax return

Disadvantages

1. Owners/Partners are personally liable for all debts of the business

Limited Partnership

Advantages

1. Limited partners have limited liability for debts of the business if they do not participate in management of the business

Disadvantages

1. General partners are personally liable for all the debts of the business

2. More expensive to create than a general partnership

C Corporation

Advantages

1. Owners have limited personal liability for all debts of the business

2. Fringe benefits can be deducted as a business expense

3. Owners can split profits amongst each other thereby limiting their overall tax rate

Disadvantages

1. More expensive to create than a general partnership

2. Paperwork can be burdensome

3. Double taxation: the corporate profit is taxed and so is the income of the owners

S Corporation

Advantages

1. Owners have limited personal liability for all debts of the business

2. Owners report their share of corporate profit or loss on their personal tax returns

3. Owners can use corporate loss to offset income from other sources

Disadvantages

1. More expensive to create than a general partnership

2. Paperwork can be burdensome

3. Income must be allocated to owners according to their ownership [1]

[1] Fred S. Steingold, Legal Guide for Starting and Running a Small Business 5 (Betsy Simmons ed., Nolo 10th ed. 2008).