When starting a new Maine-based small business, there are a variety of entity choices. Some will be easily ruled out based on the business’ operation. The six basic entities are:
1. A sole proprietorship
This is a business owned by one person, who may be the only employee. A sole proprietorship is not a separate legal entity. The owner will receive all profits, but also incurs all losses, and is personally liable for any legal claims that may arise.
2. A limited liability company
Owners will have protection from the claims of business creditors and others. Liability for individual’s business debts is limited to the value of their interest in the business.
3. A C corporation
This legal entity is owned by its stockholders united under a common name. Corporations elect a board of directors, who manage the business, and issue stock. Shareholders have limited liability for the obligations of the business. Corporate income is taxed twice, as the corporation distributes its earnings as dividends to stockholders, who then must claim the dividends as income on their personal tax returns.
4. An S corporation
This entity limits the number of stockholders to 100. Many small businesses choose this option, because it avoids the double taxation of corporations while still providing limited personal liability to the owners. There are some restrictions placed on S corps, however.
5. A not-for-profit organization
This is set up with a specific mission to improve society. It could be a museum, charitable foundation, religious organization, research group or trade association. It is not an option for a regular for-profit business. Not-for-profit organizations generally do not pay taxes on their income, cannot sell stock or pay dividends, and have strict requirements imposed on their activities.
6. A general partnership
This involves two or more owners who make business together. Partners share all profits, losses, and liability. It can be very informal, but is still considered a legal entity.
This is a very general description of the six most common business entities. In addition, there are sub-entities within some of the categories. Contact Filler & Associates to discuss the options. We can help decide which one is right for your operation.