When deciding how to structure a new business venture, several aspects must be considered.
These include the ease and cost associated with the formation, the amount of liability one is
will to assume, tax implications and the complexity of regulations and accounting.
Sole proprietorships and general partnerships are very similar to each other. They are easy and
inexpensive to set up. For partnerships, a written agreement is preferred but it is not required.
The income or loss from the business is passed along to the owner(s) personal tax return
whether or not a disbursement has been taken. The owner(s) are also personally liable for
company debts. Sole proprietorships and partnerships can be a good choice for low-risk
businesses and owners who want to test their business idea before forming a more formal
business (SBA, 2019).
Choosing to be a corporation offers some protection from the personal liability associated with
sole proprietorships and partnerships but it is more complex and costly to establish.
Corporations fall into two categories: C corporations and S corporations. Shareholders who
employed by C corporation are considered to be employees and benefit from nontaxable fringe
benefits and are only responsible for half of the employment taxes as the corporation is
responsible for the other half. If an S corporation has been elected, the employed shareholders
are still only responsible for half of the employment taxes but do not benefit from nontaxable
fringe benefits. A C corporation is subject to double taxation. Its earnings are taxed first at the
corporate level when earned, then again at the shareholder level when distributed as
dividends. An S corporation, by contrast, is subject to single-level taxation, much like a
partnership (Anderson, et al., 2023). Corporations can be a good choice for medium- or higher-
risk businesses, those that need to raise money, and businesses that plan to "go public" or
eventually be sold (SBA, 2019).
Works Cited
Anderson, Kenneth, et al., editors. Pearson’s Federal Taxation 2023 Corporations, Partnerships,
Estates & Trusts. Pearson Education, Inc, 2023.
U.S. Small Business Administration. “Choose a Business Structure”. November 19, 2019,
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
