How is your business organized? Many companies are aware of at least some of the benefits of organizing under each of the different business types, but did you know that there is at least a little difference between how each of these companies are organized and how they must be handled in the company valuation process? Here's a quick look at the differences between each basic business organization type and the impact it can have on your overall appraisal process.
How a Company Valuation is Different Between Business Organization Types
A sole proprietorship is the most basic legal organization a business can have. It can be one or multiple people acting in the interest of the business, but it's assumed that they act as one body in the interest of the company. It provides very little in terms of legal protection, so if your company were to be sued, you could also lose your home and other assets in the process. The higher level of liability must be factored into the potential for losses and any mixing of personal and business funds must be sorted out in the appraisal process.
A partnership is more detailed than a sole proprietorship and should have some documentation laid out at the beginning of the partnership to determine who owns what amount of the company and what must be done should the partnership be dissolved. It helps avoid arguments at the end of the business by having everything in line ahead of time with regards to how to split up the profits or losses when the business closes or is sold. This process is taken into account during appraisal with each partner's share calculated from the total appraised value.
Also referred to as a pass-through corporation, this type of corporation requires more paperwork to establish as a proper corporation, but also provides legal protections to the owners. However, unlike a C-corporation, an S-corporation passes earnings through to the owners, so rather than the corporation paying taxes on profits, the owners report these profits and pay the taxes on them on their personal tax returns. This can create additional growth that is factored in during an appraisal.
A C-corporation is a fully incorporated entity that exists completely separate from the owners. Like the S-corporation, it requires more paperwork to incorporate, but the taxes on profits are paid by the corporation before they are distributed to the owners, at which point the owners also pay taxes. It also provides more legal protection to the owners as it stands as its own entity. This double taxation is taken into account in terms of the corporation's growth in appraisal.
Limited Liability Company
A limited liability company or LLC is a company or corporation that is specifically set up to limit the amount of liability a company or its owners may be exposed to in the course of doing business. It can be set up in any number of organization types, but is generally designed to provide protection to the owners rather than any specific tax or appraisal benefits.
By understanding the differences between business organization types, you can gain a better understanding of how each organization works and how it affects the way that you do business on a daily basis. It also provides you with opportunity to better understand the impact it can have on your company when it's time to have an appraisal performed. Make sure to work with a certified business appraiser when you have your company valuation performed to ensure you're getting the best possible information and accuracy out of your investment.