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Selecting appropriate business form an important task for entrepreneurs, P.2

Last time, we mentioned several business forms available to entrepreneurs and some of the basic features of these types of business, from a liability, tax, ownership and formation/dissolution perspective. Aside from sole proprietorships and partnerships, entrepreneurs may also consider forming a limited liability company or a corporation to organize their business, depending on their needs and goals.

Both partnerships and sole proprietorships are typically relatively easy to form and dissolve compared to limited liability companies and corporations, but both LLCS and corporations allow entrepreneurs greater ability to generate capital. 

LLCs provide limited personal liability to members while allowing for flexibility of business management and, if elected, pass-through taxation, where individual members pay federal taxes on business income, rather than the business directly paying taxes. Pass-through taxation is available when an LLC elects to be treated as either an S corporation or a partnership for federal income tax purposes. In any case, Pennsylvania LLCs have to pay capital stock/foreign franchise tax as well. LLC members are not restricted to individuals, though, so corporations and other LLCs, or even foreign entities, may become members. Forming and dissolving an LLC requires filing the proper paperwork with the state, and is generally more involved that with sole proprietorships and partnerships.

Corporations are, of all the business forms we’ve discussed, the most complicated, largely because of the necessary paperwork for formation and dissolution. Entrepreneurs may choose between forming as a C corporation or as an S corporation, the main difference being how income and losses are calculated. Very briefly, while C corporations are taxed at both the corporate and the personal level as dividends and personal income, S corporations are considered pass-through entities, meaning that income and losses are reported only by shareholders.

A lot more could be said about the various business forms, and when one form may be appropriate over another, or when it may be desirable to select one form with the aim of eventually converting to another form. In addressing such matters, it is important to work with an experienced attorney to ensure wise decisions are made, that the proper paperwork is filled out, and that the business is run as smoothly as possible once it is formed.

Source: Pennsylvania Department of Revenue, Starting a Business in Pennsylvania: A Beginner’s Guide,” Accessed April 4, 2017. 

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