Alternatives to Corporations
We focus on corporations in this site as our domain suggests. That being said, there are alternatives to corporations. In this article, we take a look at some of the alternatives to corporations that might work for your business.
The simplest alternative is the sole proprietorship. This is not really a business entity at all. You simply start doing business by getting a business license with your town and filing a DBA, which stands for “doing business as”. You report all your finances on your tax return on Schedule C. The downside, and it is a huge one, is this entity provides you with absolutely no protection from lawsuits and business debts. If you get in the hole, assets such as your home, investments, salary and so on are all exposed.
The partnership is another alternative to the corporation. This is when two or more parties pursue a business interest. There are many business running as partnerships that don't even realize it. Two or more people just start running a business and don't have any methodology for how to deal with problems or the exit of one party. The good thing about a partnership is the tax is simple to deal with, bu the downside is you are completely exposed to liability. If you partner takes a client out to lunch, has a few drinks and then kills someone in a car accident driving back to the office, both of you are on the hook. Yikes!
The limited liability company is a new entity that is also very popular these days. The “LLC” provides your business with the asset protection of a corporation, but the tax ease of a partnership. As a result, it is often touted as the perfect business entity. This is often not true in most states. Why? The LLC is often a fee and tax trap. Consider California. The LLC must pay a $800 fee for “the privilege of doing business” in the state each year. It then must pay a tax equivalent to the percentage of its gross sales when it reaches $250,000 in sales a year. That is a GROSS tax, not a net tax. This means no deductions! Most states seem to incorporate similar approaches, which makes the entity very expensive for small businesses.
Then there the specialty entities. Each state has its own laws regarding how businesses can be formed. Some allow for one person LLCs. Others allow for professional corporations for licensed professionals like doctors and architects. In other states, there are limited liability partnerships and a host of other variations. Each of these entities are useful for a small slice of businesses, but generally are not used for run of the mill entities.
The corporation is by far the most used entity in the United States. That doesn't mean it is always the best choice. There are viable alternatives to corporations. Just make sure you know what you are getting into.