Choosing the Right Entity Type for Construction Contractors
Choosing the right entity structure for your construction company depends on many aspects and factors of your business. One of the main concerns for any business is personal liability. Although no entity structure can guarantee exemption from all liabilities, there are ways to protect yourself and your business, based on your company’s needs. Generally, there are five main entity types: sole proprietorships, limited liability companies (LLCs), partnerships, S corporations, and C corporations. The most common of these for construction contractors are LLCs, partnerships, S corporations, and C corporations. Below are brief descriptions of these four main types as well as some advantages and disadvantages of each.
Limited Liability Company (LLC)
Limited liability companies are a popular choice among construction contractors because they provide protection to an owner’s personal assets. All customer or creditor claims against the company are limited to the assets owned by the business. Additional advantages and disadvantages of the LLC structure are:
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Partnerships
A partnership is a pass-through entity owned by two or more persons. Partnerships offer the ability to grow the company with each partner assuming less risk than they would as the sole owner of the business. However, there is a loss of control for partners in a partnership since all partners must approve each business decision. A few things to consider before electing the partnership status are:
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S Corporation
S corporations are also pass-through entities. Before selecting to be an S corporation, there are a few factors to consider that determine a company’s eligibility to elect S status. Any corporation wanting to become an S corporation must have fewer than 100 shareholders and be a U.S. corporation. Only residents and citizens of the U.S. and certain trusts and estates are eligible to be a shareholder of an S corporation. Further pros and cons of an S corporation structure are:
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C Corporation
In general, C corporations tend to be very large companies. One of the main differences between a C corporation and S corporation is the way the entities are taxed. Since C corporations are not pass-through entities, they are required to pay taxes at the entity level. Other points to consider before becoming a C corporation are:
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If you have any questions on setting up your entity or considerations to make for switching from one entity type to another, please contact your HLB Gross Collins tax advisor.
-Kelsey Novak, Tax Specialist