Starting a Small Business or Nonprofit?
Many people entertain the notion of starting their own business and becoming their own boss. Then there are those who wish to begin an organization strictly with the idea of assisting those in need or giving back to society in some way. Few individuals have the knowledge of which business entity is best suited to their needs.
Reviewing common business structures, in the “for profit” world, the number of owner(s), the assumption of liability and tax filing status are some of the ways that differentiate between the entities.
One single person who begins a for-profit business with complete control of the business and any and all debts and liability of the business. All income and expense is reported on a personal tax return.
Two or more people functioning as co-owners of a for-profit business. There are two common types of partnerships; Limited Partnerships (LP) and Limited Liability Partnerships (LLP).
In a limited partnership there is usually one general partner with unlimited liability and any other partner(s) has/have limited liability and usually limited control. Separate tax returns are filed and profits are taxed at the partner level.
In a limited liability partnership, every owner has a limited liability and each partner is protected from debts against the partnership as a whole and the actions of other partners.
Limited Liability Company
An LLC is a hybrid allowing you to take advantage of benefits of partnership and corporation structures.
LLCs protect from personal liability in most cases, thus securing personal assets from risk in the event of bankruptcy or legal action. Profit & loss still passes through personal income. The caveat is that “members” must pay self-employment tax contributions towards Medicare & Social Security.
A Corporation is a legal structure that is complete and separate from its owners.
Corporations pay income tax on their profits and again when the dividends are paid to the shareholders on their personal tax returns (thus double-taxing).
The Corporation itself assumes all liabilities and debts of the Corporation, not the shareholders, providing a significant level of asset protection for the individual owners.
Similar to the C Corp however there is no double taxing with the S Corp as it permits some profits and losses to be passed through to the owners’ personal income without being subject to corporate tax rates.
Organized for charitable, education, religious, literary or scientific work, these are created and must be a benefit to the public in some way in order to receive tax-exempt status (there is neither federal nor state tax payment on profits.)
Combination of Structures
There are combinations of different structures such as an LLC to be taxed as an S Corp or a nonprofit however, if you are considering combining business structures, it would be beneficial to seek the advice of a business advisor, CPA or Attorney to assist you with your decision.