by Jane Kay

Created on: December 22, 2009

So you are about to start a business.
You have three basic choices in business structuring:  sole proprietorship, partnership, or corporation.

When you are a single owner, you can choose from a sole proprietorship or corporation.  The main difference between the two is that a sole proprietorship is not a separate entity from you; this means that the debts your business incurs are also your debts.  While setting up a sole proprietorship is simple compared to setting up a corporation, if the business should go under, your personal assets will be at risk.  The same applies to partnerships, but in a partnership, there must be at least two “partners” or owners.  The partnership pays no taxes; the individual partners file all taxes.

A corporation, however, is a separate identity.  The judgments, lawsuits, or debts that the corporation incurs are that of the business; a corporation protects your personal assets.  This may sound ideal, but there are legitimate deterrents from choosing to become a corporation.  The first is that corporations require a set of by-laws that regulate how your business is managed.  Done properly, it will include mandatory annual meetings as well as a massive set of rules on how to conduct meetings, etc.  However, more important is the fact of double taxation on corporations.

Double taxation is the process by which the corporation pays taxes on revenues as a single entity, and you, as the owner, pay taxes again on any profits, salary, or dividends that you may earn from the corporation.  Essentially, you are paying taxes twice on the same money due to having had it pass through a corporation.  

Due to the inherent flaws within these business types, two other options came to life.

Limited Liability Company (LLC)

The LLC is a good medium between partnerships and corporations.  It protects your personal assets by being a separate entity, but it also allows for the business to be taxed as a partnership, so long as there is more than one owner.  (When a LLC has only one owner, the LLC pays taxes as a sole proprietorship, and the business’ separate identity is maintained.)  Corporations have shareholders as partial owners, but the LLC has “members”.  Member can dictate how the business is run, and while you will need an “operating agreement” much like a corporation’s by-laws, the rules are lenient and they can be as simple

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