As a Pennsylvania entrepreneur, one of the most important decisions you must make is which type of business entity you will choose for your new company. This decision will affect how both you and your company will operate for many years into the future.
The Internal Revenue Service reports that your business formation options consist of the following:
- Sole proprietorship
- S Corporation
- Limited Liability Company
An exceptionally brief overview follows for each type of business structure.
If you will be the sole owner of your company, you may wish to set up a sole proprietorship. Here no difference exists between you and your business except for the fact that you can choose a company name for it. You receive all of its income, pay all of its taxes, and are responsible for all of its debts.
If other people will own your company with you and you wish to establish a partnership, you will need to draft a written partnership agreement that specifies what each partner will contribute to the company, what ownership share (s)he will receive in return, and what company responsibilities (s)he will have. Keep in mind that when it comes to income taxes, the partnership must file an informational tax return each year, but you and your partners will pay the actual taxes based on the respective incomes you received.
If personal asset protection is your main goal, a corporation will accomplish this for you since a corporation is a separate legal entity. However, a corporation submits you to double taxation since the corporation pays its own income taxes, but you and the other shareholders likewise pay taxes on the income your respective shares generated.
An S corporation election removes the double taxation scepter. Here you and the other shareholders pay the S corporation's income taxes based on the respective incomes your shares generated.
Limited Liability Company
An LLC provides you and other company members with personal asset protection just like a corporation. But in addition to individuals, your LLC's members usually can include corporations, foreign entities and other LLCs.
This is general educational information and not intended to provide legal advice.