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Considerations in choosing a business model

People who are creating new businesses in Illinois must at some point make a choice about how they will structure their new company. As explained by Entrepreneur magazine, there are multiple factors that should be reviewed in order to ensure that the right selection for the company’s needs and goals is made.

How a company wishes to organize its management and decision-making may well play into the ultimate choice. So too will be personal liability which is retained by owners if they select partnership or sole proprietorship models. The ongoing cost and effort involved in maintaining whatever structure is selected should also be considered. Finally, taxation varies greatly between the different business types and even with a potential change to the tax stucture and code in this country, this factor cannot and should not be dismissed.

The Internal Revenue Service gives a window into how different business models are taxed. Corporations today come in two forms. One of these is the traditional C corporation and the other is a relatively newer form called an S corporation. Taxes is one area in which these two structure differ. With a C corporation, there is essentially a double taxation because the company itself pays taxes on its income. Then, when shareholders receive dividends, they also pay taxes on that income. Any losses are not able to be deducted on tax returns by shareholders.

S corporations, in contrast, are called pass-through entities because all taxation is passed through from the company to the shareholders. Only these individuals pay taxes or deduct losses on their returns, not the company itself.