When people think of businesses, chances are they think of either corporations or sole proprietorships. But there are many different types of companies and company structures available for the business owner. What type depends a lot on what may make the most sense for you. Let’s look at what’s available under New York laws.
Sole proprietorships are the simplest form of business. It’s also the most popular form of business because it is a single person doing business. Sometimes sole proprietorships take on names and are referenced as “doing business as.” Sole proprietorships at the bonus of simplified taxes — everything you earn goes directly to your individual tax return. As a sole proprietor, you make all the business decisions. And as your business grows, you can easily convert a sole proprietorship into another type of business.
The downside to sole proprietorships is that there is no division between personal and business liability and accounting. It’s harder to raise money for business purposes if you own a sole proprietorship over another type of business. The business dissolves either upon the business owner’s death or retirement.
General partnerships can be formed between individuals, companies or corporations, or combination thereof. Although it is called the partnership, many entities can make up a partnership. Partnerships, like sole proprietorships, do not require special documentation to do business. However, like sole proprietorships, partnership liability entails being completely liable for all members’ decisions and actions. This is why it is important to have a written contract about what is expected between partners, even though the law does not require it. The partnership doesn’t have to pay business taxes; each partner accounts for the income they receive in the partnership in their taxes.
Corporations fall into two different types: C corporations and S corporations. C corporations are the most common type of corporations which creates an entity outside of the individuals, which can be sued, held liable, enter into contracts, and taxed as its own entity. S corporations hold the protections that C corporations have but allow individuals to treat income similar to sole proprietorships and partnerships. As corporations cannot have more than 100 shareholders, and all shareholders must be individuals. Furthermore, S corporations cannot have foreign shareholders. Corporations must hold board meetings, shareholder meetings, and must keep most of these meetings documented. Of all the business entities, these are the most complex.
Limited Liability Company
The limited liability company or LLC is a hybrid form of a corporation and a partnership. Corporations have a number of rules and formalities that they must adhere to in order to maintain being corporations. Limited liability companies can be handled similarly to sole proprietorships while still having the protections that an S corporation provides. At the same time, limited liability company owners (called members) can either simply declare their income on their individual taxes or choose a corporation tax structure. Limited liability companies often have rules that vary from state to state, so it is not always consistent.
Limited partnerships are those partnerships which are formed like limited liability companies, with some notable exceptions. Partners are still liable for their business debts, but there can also be silent partners involved in the partnership. The business management is often detailed in a contract, as are the disbursement of income.
What type of business you decide on depends what makes the most sense for you. Small businesses may opt to be sole proprietorships, partnerships, limited partnerships, S Corporations, and LLCs. Larger companies may prefer C Corporations, LLCs, or limited partnerships. What you choose depends largely on how complex or simple you want your business to be and what tax advantages and protections you want.