Choosing one type of business entity for your company is a complicated task. It requires several careful deliberations because every business entity type has its set of legal and tax benefits and problems in government contracting.
Naturally, you’ll need to consult with your accountant and your lawyer. Before you do all of that, there are things that you should consider on your own, and mistakes that you should avoid.
- Having a formal business entity is a necessity due to many legal and tax reasons
- Understand the tax consequences of each business entity
- The business entity does not protect you personally against all risks, only some
- A business agreement between you and your partners must exist
The Benefits of Each Type of Business Entity for Government Contracting
The types of business entities that you have at your disposal are; partnership, sole proprietorship, limited liability company (LLC), C corporation, and S corporation.
We will discuss each one separately for you to know its importance and which one is the right fit for you.
A partnership implies having several owners, so if you have business partners, this one is probably the best choice. Taxes are paid separately by each owner, not on the entity level. Naturally, this also allows for flexibility in income allocation.
There is also the advantage of flexibility in the ownership structure and more ability to raise capital. However, any disagreements between partners can jeopardize the entire company, which is why agreements are necessary as well as the trust between partners.
- Sole Proprietorship
Sole proprietorships can mostly be avoided due to the many potential and extended personal liabilities, making them unsuitable for you or your needs, especially in government contracting.
- Limited Liability Company (LLC)
LLCs are useful for their flexibility with taxation. They can essentially take the form of most other entities. They can be taxed as either an S Corporation or a C Corporation. Owners can also get many other positive features that partnerships and other entity types have.
- C or S Corporation
These two are quite similar which is why we are grouping them. Corporate formalities, the existence of shareholders, and limited liability protection for owners are the main similarities between the two.
However, the differences are the ones that will help you choose the right one. S corporations have only one type of stock, and all the capital gains and losses go to the shareholders; while with C corporations, there are multiple stock classes and they suffer from double taxation or profits.
Which One Is the Right Fit for Your Business?
It all depends on what you need and what you hope to get from your government contracts. If you require assistance in finding that out and choosing the right business entity, you can contact Chestnut Street Consulting LLC.
We deal with many different companies, small businesses like yours, entrepreneurs and more. We also specialize in government contracting, and we can help you grow your business to its fullest potential in this beneficial sphere.