Choosing Between a Sole Proprietorship, Partnership, Corporation, or LLC
When should you choose a sole proprietorship?
Although there is no hard and fast rule, if you are a new business and will be the only owner, I generally recommend that you do not form an LLC or Corporation but operate as a sole proprietorship. The main exception to this rule is if you have substantial assets to protect; in that case I often recommend an LLC or Corporation. If you are having trouble deciding, please contact me for a free consultation and we can decide if we can work together on your issue.
When to form a partnership?
Generally, almost never. A partnership has the distinct disadvantage that all partners are personally liable for all partnership debts. For example, if your partner, in the scope of partnership affairs, gets in a car accident and causes injuries to someone else, you are personally liable (this means all your personal assets are on the line). Further, a good partnership needs to have a solid agreement between the partners. By the time you have invested the time and energy required to craft a partnership agreement, you might as well have formed a corporation or LLC and gotten the liability protection that those entities offer.
Forming an entity: Corporations and LLCs
Forming an entity like a corporation or LLC can make sense for many established sole proprietorships; in instances where two or more people are choosing to go into business together; or if a founder has substantial personal assets she wants to protect.
When to form a corporation?
Choosing a corporation over an LLC is a very fact-dependent choice, and should probably be discussed with an attorney. You may want to read my article “The Pros and Cons of a Corporation” to help understand how a corporation might affect your business. With that said, I often recommend a corporation in the following situations:
Your accountant has recommended you elece S corporation status, and isn’t comfortable with an LLC taxed as an S corporation.
You are intending to raise substantial capital by the sale of securities.
When to choose an LLC
An LLC is often superior to a corporation because it does not require the same level of formalities as a corporation, it can be taxed in the way most beneficial to the owners, and the profit-and-loss share can reflect the owners’ business deal rather than be dictated by stock ownership. Generally, I recommend an LLC over a corporation unless one of the situations enumerated above applies. I have written an article titled “The Pros and Cons of an LLC” you may want to read if you think an LLC might be right for you.
The ramifications of Corporate or LLC status can be complex, and you may want to contact an attorney to discuss the specifics of your situation.