Business Formation - Instructions for Customers

This choice affects everything from how you're taxed to how much personal risk you take on — and even how much paperwork you'll be responsible for. We understand that this process can be confusing and sometimes overwhelming. That's why Ella Business Center is here to guide you. Based on your expectations, resources, budget, and long-term goals, we'll help you choose the structure that makes the most sense for your situation — and we'll handle the setup from start to finish.

Below is an overview of the most common types of business entities, along with the level of complexity, protection, and commitment involved in each.

1. Sole Proprietorship

A sole proprietorship is the easiest and most common type of business ownership. It works well for individuals starting a business on their own, such as freelancers, independent contractors, or small shop owners. The main benefits of a sole proprietorship are low startup costs and minimal requirements. However, the biggest drawback is that there is no legal separation between you and your business. This means you are personally responsible for all debts, obligations, and lawsuits. There is very little formality involved. You may only need to register a business name (if it differs from your own) and obtain any necessary local licenses or permits.

2. Partnership

A partnership is a suitable choice for two or more individuals who wish to start a business together. It is easy to set up, and it allows partners to share the work, responsibilities, and profits. Each partner is usually responsible for the business's debts unless they form a limited partnership (LP) or a limited liability partnership (LLP). Partnerships can be formal or straightforward. A written partnership agreement is not legally required, but it is highly recommended. The contract should clearly outline each partner's roles, responsibilities, and procedures for addressing a partner's departure or any disputes that may arise.

3. Limited Liability Company (LLC)

An LLC, or Limited Liability Company, is a popular choice for business owners who want to protect their assets while maintaining flexible tax options and straightforward business operations. One significant advantage of an LLC is limited liability, which means that your assets, such as your home or savings, are typically protected if your business encounters lawsuits or debts. LLCs also provide different tax choices, including pass-through taxation, which helps you avoid paying taxes twice on your income. Starting an LLC involves a moderate level of formality. You need to file Articles of Organization, get an Employer Identification Number (EIN) from the IRS, and create an Operating Agreement to outline how your business will run and who is responsible for what.

4. C Corporation (C-Corp)

A C Corporation is a complex business structure often used by larger companies or startups looking to raise money, sell stock, or go public. C Corporations provide strong protection against personal liability and can have an unlimited number of shareholders, including other companies and foreign investors. However, they face double taxation: the corporation pays taxes on its profits, and then shareholders pay taxes again on the dividends they receive. This structure is formal and requires several steps. You need to create Articles of Incorporation and corporate bylaws. You must also hold regular board and shareholder meetings, as well as file annual reports.

5. S Corporation (S-Corp)

An S-Corporation (S-Corp) offers many of the same legal protections as a C-Corporation (C-Corp) while benefiting from pass-through taxation. Profits are reported directly on the owners' personal tax returns, allowing them to avoid corporate taxes. S-Corps have some critical limits to consider. They can have no more than 100 shareholders, and all shareholders must be U.S. citizens or residents of the United States. Corporations and partnerships cannot be shareholders. S-Corps also need to follow strict rules set by the IRS. In terms of formal requirements, you must comply with all C-Corp obligations and also file IRS Form 2553 to elect S-Corp status.

6. Nonprofit Organization

A nonprofit organization is a type of corporation created for charitable, educational, religious, or social purposes. Nonprofits can apply for tax-exempt status and may be eligible to receive grants and donations. They must follow strict rules, including serving the public, not distributing profits, and keeping clear records. To set up a nonprofit, you need to file IRS Form 1023 for federal tax-exempt status, incorporate at the state level, and meet annual reporting and compliance requirements.

Contact Ella Business Center at (718) 386-4222 to schedule an appointment for personalized assistance.