This is our final installment in this series, wherein we’re highlighting the pros and cons of each of the six business structures. Previously, we discussed Sole Proprietorships, LLCs, Cooperatives and Corporations. Today we’re happy to present S Corporations and Partnerships. We encourage you to visit our source, SBA.gov, for additional details about each business structure.
- There are tax benefits that apply specifically to S Corporations. When it comes to employment tax, the only money taxed as such in an S Corporation are the wages of shareholders who are employees. Other income is considered a distribution, which may not even be taxed in some circumstances.
- Employees or shareholders are able to write off some of their expenses as business expenses.
- Like a Corporation, if shareholders leave the company, business can continue with little disruption.
- S Corporations require more time and effort on the operational side.
- There are requirements regarding how compensation is paid (i.e. Distributions vs. Wages) and a company may be taxed more severely if an audit reveals, for example, that shareholders are receiving low salaries with high distributions.
- Partnerships are easy to start, both in regard to time and money. The partnership agreement usually takes more time to develop than anything else.
- Because the business is not being started by just one person, there is more opportunity to begin with more money, whether from partner contributions to the business or simply by appearing a stronger candidate for a loan.
- One partner may be great at marketing and business development, while perhaps the other is more skilled with the administrative side of running a business. In a partnership, the business owner entity may draw on more strengths than in, for example, a Sole Proprietorship.
- By offering employees a chance to become a partner, businesses that are of this structure are often attractive to loyal, motivated employees who are seeking career growth.
- The liability in a partnership can be greater than with many other business structures. There is no separation between the business’ actions and the partner’s liabilities. Each partner is liable not only for their own actions and the actions, but also every other partner. This includes not only decisions, but debts as well.
- There can sometimes be too many cooks in the kitchen. As a partnership grows and more employees become partners, there are more people working together to compromise on business decisions. This can sometimes lead to disagreements and disputes.
- Partnerships have shared profits, but if all the partners aren’t sharing the work, there can be issues between them.
Now that you have a picture of the pros and cons of each of the six business structures, hopefully deciding which is right for you will be easier. If you would like help, we’re here to provide individualized consultation–we’ll be glad to help you get your business started as well.