If you were to start a business right out of college based on an idea you developed in college, what form of business ownership would you choose: sole proprietorship, C corporation, S corporation, or LLC?

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Choosing which type of business ownership is best for you and your company will depend on the nature of the company itself and your vision. Let's begin by considering some of the advantages and disadvantages of each.

Sole proprietorship is simple—but risky. The major disadvantage to this type of business...

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Choosing which type of business ownership is best for you and your company will depend on the nature of the company itself and your vision. Let's begin by considering some of the advantages and disadvantages of each.

Sole proprietorship is simple—but risky. The major disadvantage to this type of business is that if your business is sued, the owner can personally be sued for damages. This could quickly lead to personal financial ruin in a large lawsuit. LLCs and corporations are able to instead separate business lawsuits from personal assets. However, if you have a small business that is highly unlikely to encounter lawsuits (perhaps a small, in-home business), this might be the most beneficial type of ownership.

An S corporation allows you to lower your taxes by taking out a dividend to allow yourself a reasonable salary for the work you do in your business. This can drastically reduce the taxes you must pay.

An LLC doesn't allow you to allot a salary to yourself, but this is still a good option for those whose net profits are small enough that a "reasonable" salary which they might claim is not more than the net profits of the company. For example, if a comparable "reasonable" salary for a florist is $35,000 and your floral shop nets around $35,000 a year, an LLC might be a good option. The LLC also provides personal asset protection.

A C corporation also has limited liability, but in this case, profits can be kept within the business. Larger companies often fall under this type of ownership simply because of size and the ability to maintain the business even if the original owners leave the company. Sometimes companies are forced into this type of ownership, particularly in terms of the number of shareholders.

It is highly unlikely that a business starting right after college would be large enough to require a C corporation designation. Sole proprietorship might be a good option for a small business with very low liability, but the idea of being personally liable for the failings or oversights of the business might make some business owners quite nervous. Therefore, an LLC is the most likely option for a small business right out of college who seeks to protect personal assets from any legal liabilities of the business and whose net profits for the company are not much larger than an expected salary for that work.

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