(as presented by Dave Wilke on 7/31 edition of The American Entrepreneur)

In general, there are seven entities from which your business can choose to operate, either from inception or acquisition:

• Sole Proprietorship
• General Partnership
• Limited Liability Company
• S-Corporation
• C-Corporation
• Limited Partnership
• Not-for-Profit (not considered here, as there are no profits to tax)

Most people start out as a sole proprietorship; It’s free and it’s simple in that, people don’t have to deal with complexities of taking on other partners. (If you feel your business can handle a second partner, then a general partnership may work best for you).

Beyond the concept of a sole proprietorship, there are a series of questions that should be considered in order to properly determine what entity your business should assume:

• Do you have any personal assets?/Do you have good credit? If the answer to either of these questions is yes, then your business should not exist as a sole proprietorship or general partnership, as those two entities don’t provide any personal asset protection. (i.e. any liability will fall directly upon the owner(s)).
• How many owners in the company (now and 5-10 years in the future)?
• What is the exit strategy of the business (retirement)?
• Any involvement in multi-state activities?
• Are fringe benefits important?
• How will financing be handled (bank/investors)?
• What is the projected income of the company?

Upon considering those questions, you can now focus on the various remaining types of business entities to choose from:

• -Limited Liability Companies (LLC’s): If you’re a single member, the State of Pennsylvania treats LLC’s like sole proprietorships. This is best suited for a company that may lose money over the first couple of years, as that loss is often passed through to a number of investors, as opposed to one owner (sole proprietorship) who stands to lose everything. One caution: the taxes on the LLC’s profits are often the highest of any business entity.
• -C-Corporation Unlike the other entities, a C-Corporation is taxed on its’ profits, not just the flow of income towards its owner(s). This is best suited for a company whose exit strategy is to go public. There is also the prevalence of fringe benefits, such as certain types of healthcare, in C-Corporations that aren’t there in other entities, as the business owner(s) is/are entitled to a pre-tax deduction.
• -S-Corporation – The profits on an S-Corporation generally not taxed, which is an advantage on one hand, but it can also be greater cause for an audit, especially if the chief officer’s salary does not show up on the tax return. That has led to the concept of “Reasonable Compensation”, the idea that an owner has to allow for an undefined salary based on how the business performs. Probably best suited for a company that intends to make $25K - $100K in profits.
• -Limited Partnership – Generally, the biggest decision to consider when taking on a limited partnership entity is figuring out who the general partner is. This entity is the only one that does not pay the Capital Stock Tax in the State of Pennsylvania. Best suited for a company whose profits exceed $100,000.

For more information on Business Entity Choice, contact Wilke and Associates at (412) 278-2200, or on the web at www.wilkecpa.com. Wilke and Associates’ “Ask the Accountant” segment can be heard Saturdays at 9:15 AM on The American Entrepreneur.