What business structure should you choose?

There are really only four types of business structure most consultants choose from. Each has its own unique set of strengths and weaknesses:
• Sole Proprietor (taxed as 1040, Schedule C): are unincorporated businesses. They are also called independent contractors, consultants, or freelancers. There are no forms you need to fill out to start this type of business. The only thing you need to do is report your business income and expenses on your Form 1040 Schedule C. This is the easiest form of business to set up, and the easiest to dissolve, but it provides the least protection.

• C Corporation (taxed as 1120): are incorporated businesses. Every form of business besides the sole proprietor is considered a separate entity, and this often provides a measure of legal and financial protection for the shareholders. The shareholders of corporations have limited liability protection, and corporations have full discretion over the amount of profits they can distribute or retain. Corporations are presumed to be for-profit entities, and as such they can have an unlimited number of years with losses (ask your accountant why that can be a good thing).

• S Corporation (taxed as 1120S): have features similar to a partnership. If any shareholder provides services to the business, the S-Corp must pay that shareholder a reasonable salary. This salary is a separate payment from distributions of profits or losses. S Corporations have the same basic advantages and disadvantages of general or close corporations. S Corporations avoid the “double taxation” of C corps (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the shareholders. However, like standard corporations (and unlike some partnerships), the S Corporation shareholders are exempt from personal liability for business debt.

• Limited Liability Partnership or LLC (taxed as 1065): are unincorporated businesses. Unlike corporations, partnerships must have at lease one General Partner who assumes unlimited liability for the business. Partnerships must also have at least two shareholders. Partnerships distribute all profits and losses to their shareholders without regard for any profits retained by the business for cash flow purposes. Many business professionals believe LLCs present a superior alternative to corporations and partnerships because LLCs combine many of the advantages of both.

There are also Trusts and Non-profit structures, but I’m not aware of any consultants who have ever chosen either of these. If you have any questions about which structure is right for you, it is best to consult with your attorney or accountant.

Which business structure did you choose and why?