In Part 1, we explored Sole Proprietorship and Partnership ownership interests. In Part 2, we explored Limited Liability Partnerships, Limited Partnerships, Limited Liability Companies. In Part 3, we explored Corporations, where to incorporate, and started discussing some basic tax considerations.
Now we will explore the taxes in a little more detail and what tends to be the cheapest to start.
All Partnerships are taxed under Subchapter K of the Internal Revenue Code (Partnership Taxation). Subchapter K is a complex and evolving Subchapter of the IRS code with a lot of flexibility and also a lot of opportunities to cost you more money than you need.
Sole Proprietorships are taxed as a disregarded entity, where the tax liabilities fall to your personal tax returns. For a profitable business, there are better options to minimize tax liability.
As mentioned in Part 3, corporations are taxed as either C-Corporations, S-Corporations, or even non-profit Corporations. Most businesses are currently opting for taxation as an S-Corporation, but there are times (and industries) that opting to be taxed as a C-Corporation would be better. If you are looking to start a non-profit corporation, then you will likely also need to obtain your 501(c)3 status from the IRS.
Limited Liability Companies can be taxed under any of the above options, with some limitations. A Single-Member LLC can opt to be taxed as a disregarded entity (default), a C-Corporation, or an S-Corporation. A Multi-Member LLC can opt to be taxed as a Partnership (default), a C-Corporation, or an S-Corporation.
In most situations, our default is to form a Corporation and select the S-Corp tax elective. Depending on the nature of the business, the advice can (AND DOES change) because this solution is definitely not right for everyone.
There can be great variances with the pricing, and it really depends on what you are looking to accomplish. In general terms, a properly formed Corporation is cheaper to form than a properly formed Limited Liability Company or a properly formed Partnership because it is simpler to draft the Articles of Incorporation, Bylaws, and Minutes than to draft the needed documents for a Limited Liability Company.
Additional needs, such as Shareholder Agreements, Employment Agreements, etc. can also add to the costs.
In general, explore the reasons that a for-profit corporation should not opt for S-Corp treatment (business type, shareholder limitations, etc.) and ensure that you do it right.