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The Sole Proprietorship is the simplest form of business entity. However, without the protection of a corporate shield, personal assets are exposed to business liabilities. And even if a small business owner doesn’t have assets today, a judgment against that business owner can last up to 22 years. Therefore, in light of how easy and inexpensive it is to incorporate or form an LLC, the only real question is whether you should form an LLC, a C Corporation, or an S-Corporation. Here are the important factors to consider in selecting your business structure:
1. Limited Liability Company (LLC). In an LLC, the owner’s personal assets are shielded from business liabilities just as they would be in a corporation. In addition, the IRS views the LLC as a "disregarded entity." That means the LLC does not file separate taxes; company profits and losses flow through to the owners and are subject to each owner’s individual tax rates. The LLC is great for a business that wants liability protection, but seeks minimal formality. It’s also the perfect structure for a business with foreign owners since anyone (C Corp, S Corp, another LLC, a trust, or an estate) can be an owner of an LLC.
2. S Corporation. An S Corporation is great for a small business owner who can qualify: The IRS places limits both on the number of owners and on who can be an owner in an S Corporation. All owners are taxed based on their percentage of ownership.
3. C Corporation. The C Corp is ideal for a business that intends to raise capital by issuing stock or attracting investors through VC funding.
Chief Executive Officer
Westlake Village, Calif.
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