Understanding Corporation Types
When incorporating your company, there are several corporate designations to consider, each with its own pros, cons, and legal considerations.
If you’ve decided that a corporation is the best business entity for you, it’s time to take a look at the different options you have when it comes to corporations. Corporations offer some great tax benefits as well as protect you as the owner, along with your assets.
The S-Corp is very popular among small business owners. S-Corps provide the advantages of a sole proprietorship within the structure of a corporation. With the S-Corp, your company is taxed once over, whereas other corporate designations are taxed twice over, also known as “double taxation.” S-Corp company profits are never taxed for Social Security or Medicare. Many small business owners find S-Corps the easiest to file and manage. With the S-Corp designation you have limited liability, which means that you as the business owner are not liable for lawsuits or other debts to the corporation. You are, however, limited to 100 shareholders with this type of corporation.
A C-Corp is a standard corporation with a wide variety of fringe benefits, in addition to fewer taxes levied upon it. With a C-Corp, you can engage in what’s called “income shifting,” whereby your company can take advantage of lower income tax brackets, depending on your company’s income.
One of the drawbacks to a C-Corp is the double taxation issue mentioned above. Both corporate profits and shareholder dividends are taxable. Also, C-Corps cannot pass losses on to shareholders.
Limited Liability Company
An LLC is not a “corporation” in the classical sense. However, LLCs can be treated as corporations, partnerships, or “pass through” entities. LLCs protect owners and keep their assets from being taken in the case of bankruptcy or lawsuits. LLCs are not required to conduct annual board meetings corporations. There is also more flexibility within LLCs when it comes to taxation.
Unlike corporations, LLCs’ profits are subject to Medicare and Social Security tax, and there are restrictions on LLCs’ transfer of ownership.
Deciding Which Corporate Designation to Choose
It can be difficult to know which form to choose for your business. Keep these things in mind:
- Do you plan on selling your company at some point in the future? Which form makes it easiest to transfer ownership and is the most appealing corporate form for a new owner?
- How many shareholders do you want in your corporation?
- How will you divide the company into shares? What percentage equity do you want the company to retain?
- What are the state laws and programs that will affect your corporation?
- Do you need to protect your personal assets?
- Do you want to have a Board of Directors that oversees major decisions for the company?
Keep in mind that some states’ laws and legal procedures are more corporation-friendly than others (Nevada and Delaware are very popular), so if your company isn’t bound by region, consider incorporating your business in a notably corporate-friendly state.
Pay your fee, file and wait to receive your paperwork back making your company official!