Business Brokers Blog: Guide to Buying or Selling a Business

Understanding the 7 Business Entity Structures when Buying a Business

When buying a business, purchasers are often very consumed with the analysis and negotiation of the business, due diligence, learning about the specific business, and possibly the emotional roller coaster of being a first time buyer.  They often relay on the accountant or attorney to recommend which business entity type is best for them when buying a business.   Each choice has different tax consequences as well as liability concerns. Both your attorney and accountant should be consulted to find the best solution for you however it is best to start to understand the differences between the business entity types since you could easily become overwhelmed with all the tasks to be completed to buy a business.  Many buyers are first time business owners so they must go through the process of setting up a business entity for the first time.  There are 7 general business entity structures that most consider:

C Corporation – This is one of the most common business entity forms, which is often used by many large companies, both public and private.  The company is required to register and file forms in the state it is incorporated.  The entity pays tax at the corporate level and the capital gains are also taxed at the corporate level versus personal capital gains rates (which are lower).  Dividends that are paid to shareholders are taxed at the shareholder level and rates.  An advantage is that shareholders have limited liability in a C Corporation.

S Corporation – An S Corporation is incorporated just like the C Corporation but receives flow through taxation.  Shareholders also have limited liability in an S Corporation for business related transactions.

Limited Liability Company (LLC) - This also is a formal business structure under a state statute.  This type is somewhat of the most flexible in that the entity can be taxed as a partnership, a C Corporation, or an S Corporation, depending on the choice of the owner.  The members of this entity form have limited liability protection.

Limited Partnership – This is a formal business structure under a state statute.  It provides limited liability for limited partners but full liability to general partners.  An advantage is that the business entity structure offers flow through taxation.

General Partnership – This form could have a formal or informal formation when two or more individuals have ownership.  This business entity form has flow through income for taxes but the owners have liability exposure from operations.  There may also be issues where partners may be liable for another partner’s actions.

Personal Service Corporation – Created formally, this type is designed for personal service providers such as doctors, lawyers, and accountants.  It has a flat tax rate and does not carry limited liability for the owners.

Sole Proprietorship – This is the least formal entity type.  The benefit is that the business entity has flow through income for taxes.  However, the structure does not offer the business owner with protection from operations.

For your own due diligence, whether you are buying a business or starting a business from scratch, it is important to study the potential implications both financially and legally from your business entity selection.  A good accountant and attorney will be able to listen to your objectives and present the best options to you.