Choosing the Right Entity Type for Your Business
When starting a construction business, there are countless I’s to dot and T’s to cross — and if you thought coming up with a name was challenging, there’s far more work to be done. One of the important decisions a new business owner can make is choosing the right type of business entity, as the right entity can protect business owners for years to come. Conversely, the wrong entity type can expose Minnesota contractors to liability (and inflate a tax bill.) A business entity is similar to birthing a child; it is the creation in the eyes of the state of a new “person,” the business, with its own birthdate, duties and obligations, bank accounts, and, eventually, death date. By creating, and maintaining, a proper business entity, the owner protects his or her personal wealth from the debts and obligations of the business.
Fortunately, you’re not alone — and the team at MNCLS has helped countless construction professionals choose the right entity type for their business. We’ve also been in your shoes and know both the positive and negative impacts an entity can have on a business. Below, we’ll walk through the various types of business entities, as well as the unique benefits of each to help you make the right decision for your business.
Types of Business Entities
Limited Liability Company (LLC)
LLCs are a common choice for construction professionals, as they provide the tax advantages and liability protection of other entity types with added flexibility. Independent contractors can benefit from an LLC in the same way that a team of 10 can, and business owners can leverage multiple “layers” of LLC for added liability protection. Further, LLCs can opt to be structured similar to a partnership or a corporation, allowing businesses to take advantage of benefits from various entity types.
Who it’s for: Contractors looking for protection and flexibility
S corporations (or S Corps) are known as pass-through entities, meaning all income generated by the business passes through to business owners to prevent double taxation. This entity type is also an ideal choice for small-to-midsize construction businesses, as an S corporation allows for up to 100 shareholders — all of which must be U.S. citizens or permanent residents. S corporations require more strategic thinking than LLCs, but for the right construction businesses they can be valuable tools.
Who it’s for: Business owners (with less than 100 shareholders) prepared to think strategically
Unlike an S corporation, C corporations are not pass-through entities — and business owners operating as a C Corp may face double taxation. Further, C corporations are generally very large businesses which are subject to a hefty corporate tax. Whereas S corporations have restrictions on who can be a shareholder, C corporations do not; this added flexibility is likely one of the only advantages for most business owners.
Who it’s for: Very large construction businesses with international shareholders
Similar to S corporations, partnerships are pass-through entities that allow business owners to avoid double taxation. While partnerships offer additional protection with each partner assuming less risk than if they were the sole owner, they bring with them a sort of checks and balances system — with business decisions being subject to approval from each partner. With that said, LLCs still offer greater protection against liability.
Who it’s for: Business owners looking to grow their business with input from other parties
A sole proprietorship is not an entity at all. Rather, it is what an owner has if he or she doesn’t create and maintain a proper business entity. Without the protection of the business entity, all of owners’ personal assets can be taken to satisfy debts or a lawsuit.
Who it’s for: Honestly? No one we know of in the construction business.
Make Your Business Entity Work for You
Just like no two construction businesses are created alike, each business entity has its own set of unique benefits — and ensuring your business leverages the right one is a crucial step in protecting your business, empowering growth, and taking advantage of tax incentives. While the team at MNCLS are not professional matchmakers by any stretch of the imagination, we have lived the hard hat life and can make sure you’re paired with the right business entity for your needs.
To maximize the benefits of a business entity and protect your livelihood, call on the team at MNCLS.