If you plan to start a business in Arkansas, one of the first decisions you will need to make is choosing the best business entity structure. There are several types of businesses in Arkansas, each with its own pros and cons. In this article we will take a closer look at each type of entity.
A sole proprietorship is the simplest type of business entity in Arkansas and most other states. As the name suggests, it is a business that is owned and operated by a single individual. There is no legal separation between the business and the owner, which means that the owner is personally responsible for all aspects of the business, including debts and legal liabilities. This type of entity is also known as a "DBA" or "d/b/a" which means "doing business as."
A partnership is a business entity that is owned and operated by two or more individuals. There are two types of partnerships in Arkansas: general and limited. In a general partnership, all partners are equally responsible for the business, including debts and legal liabilities. In a limited partnership, there are general partners who are responsible for the business and its operations, and there are limited partners who are only liable for the amount of money they invested in the business. Limited partners are usually considered partners earning passive income, meaning they do not participate in the operations of the business.
Limited Liability Company (LLC)
An LLC is a type of business that provides owners with limited liability protection and is therefore very popular. Its protection is similar to that of a corporation, creating a separate entity that shields owners/members. The owners of an LLC are not personally liable for the debts and legal liabilities of the business except in extraordinary circumstances. A benefit to an LLC is pass-through taxation. Unlike corporations, where the corporation pays taxes and then shareholders pay taxes on dividends, an LLC does not pay taxes; rather, the tax liability is passed on to the owners who pay taxes on profits.
A corporation is a separate legal entity from its owners, which means that it can enter into contracts, borrow money, sue or be sued, etc. Shareholders own the corporation and are not personally responsible for the corporation's debts or legal liabilities. If the corporation is sued, the shareholder is not personally sued (except in rare cases). There are two types of corporations in Arkansas, C and S corporations, also known as "C-corp" and "S-corp."
A C corporation is taxed as a separate entity, which means the corporation pays taxes, and then the shareholders pay taxes on individual dividends they receive. S corporations, on the other hand, are not taxed separately, but operate more like LLCs for tax purposes. The profits and losses of the S-corp are passed through to the shareholders, who eport them on their personal tax returns. Not every corporation qualifies for S-corp status.
Choosing the right business structure is important to minimize liability as well as tax debt. We recommend you consult with an attorney before making such an important decision.