If you need to have complete control, an LLC or sole proprietorship may be the best choice. While a single person can control a corporation, as the business grows, it will become a board-directed entity. If you plan to seek outside funding for your business, you may want to establish a corporation. Corporations can secure additional funding and sell stock as opposed to sole proprietorships, which can only obtain funding through their personal bank accounts or by taking on partners.
Find jobs. Company reviews. Find salaries. Upload your resume. Sign in. Career Development. Types of businesses. Sole proprietorship. Limited liability company LLC.
Corporation - C corp. Corporation - S corp. Corporation - B corp. Corporation - nonprofit. How to choose which type to start.
Capital investment. What Is Return on Capital Employed? With Examples. Essentially, the advantages of partnerships and corporations are combined in an LLC, mitigating some of the disadvantages of each. If you need assistance with any aspect of your firm's business organization needs, reach out to our firm for the legal assistance you need. We can help clients clarify their business choices, so call now! Previous Post Next Post. With an S corp, the profits are passed directly to the S corp shareholders, meaning shareholders are responsible for the taxes.
This allows the S corporation to avoid corporate tax, as the profits are being taxed at a personal level when the shareholders report it on their income tax returns. But, there's a catch: any shareholders of an S corp can't be corporations, nor can they be partners with the company.
This means shareholders are generally part of a trust or estate, or are individuals and non-profits. This limits who can be a shareholder, but again, allows you to take advantage of lower corporate taxes in many cases.
S corporations can be general partnerships, LLCs, or corporations, making them rather flexible. While there are certain tax benefits, it's worth noting the IRS tends to pay extra attention to S corporations. This is because the structure provides loopholes through which shareholders may try to evade taxes. For example, an S corp could claim employee pay is actually a distribution and avoid taxes.
A C corporation is similar to an S corporation, in that it can be a partnership, corporation, or LLC. A C corp is also privy to certain tax benefits, chief of which is that the profits of the company are taxed independently of the profits of the owners.
Unlike S corps, a C corp can have any number of shareholders from any background. This means C corp shareholders can also be employees of the corporation itself. But, a C corp must have a board of directors. The board of directors acts as the decision-makers for the company, while the shareholders are more like the financial backing.
C corporations can be hit with double taxation, however, which happens when the profits of the company are taxed at the corporate level and then again on individuals' income tax returns. This is often avoided by spreading profits out to employees as benefits, which allows the corporation to be taxed at a lower rate on a personal tax return.
But, this complicated corporate structure often necessitates an account or financial advisor, which is an added cost. If your plan is to grow your business and eventually sell it, a C corporation can be a great way to keep your personal assets as a separate legal entity from your professional corporation.
The ability to have a number of shareholders, even those from other corporations, gives C corps great growth potential, too. Just remember: you will likely incur financial costs in the form of paying advisors, especially come tax time. A non-profit corporation is similar to a traditional corporation in structure: There's generally a board of directors, as well as donors or financial backers.
But, a non-profit generates no profits, as the name implies. The business is not considered a separate legal entity from its owner and it doesn't have to register with a state. This feature has pros and cons. On the pro side, the sole proprietor has full ownership rights in decision-making and doesn't have to answer to a board of directors or other owners. It also means the owner receives all the profits of the business. Taxes are fairly simple, consisting of a Schedule C form included in the owner's personal tax return.
On the con side, it means the owner must take all of the losses of the business. It also means that the owner may be personally liable for the debt of the business, in bankruptcy, for lawsuits against the business, and for general liability purposes. Sole proprietorships might be a good choice or starting a new business in a low-risk situation before forming a more formal business.
An incorporated business is separate from its owners for operations, taxes, and liability purposes. The corporation is formed with articles of incorporation under the laws of the state in which it operates. Corporations are costly to form because, in addition to the state registration, they must have a board of directors, keep regular meeting minutes and other corporate records, and report to shareholders. The corporation pays its own taxes and the owners pay taxes on dividends as shareholders, which in some cases may be double taxation.
Two benefits to incorporating are the generally low corporate tax rates and the ease of raising funds from investors. Two types of corporations are designed specifically for professionals in practice with other professionals.
A professional corporation is a specific type of corporation for licensed professionals such as attorneys, doctors, architects, or accountants. These professionals can form a corporation in some states with the liability protection of a corporation. But in this business type, each professional is still liable for their own wrongful professional actions.
A personal service corporation PSC , meanwhile, is limited to providing personal services. To qualify for this status, the PSC must meet certain IRS requirements including shares of stock owned and amount of services performed by owner-employees. A wide range of professional fields can qualify as a PSC. A subchapter S corporation or S corp is a corporation which has the limited liability benefits of a corporation but is taxed as a pass-through business, like a partnership.
The S corporation owners aren't double-taxed on their income, but there are several restrictions on electing S corporation status, including a limit of shareholders and only one class of stock. Taxes are fairly complex for S corporations because they must file a federal tax return return, have separate schedules for the tax due from owners, and some states also tax S corporations.
Like corporations, though, S corporations must have a board of directors and follow all the filing and operating procedures of a corporation. An S corporation is not set up by registering with a state. This election must be done within a specific time period so check with a tax professional to make sure the election is done correctly. All states allow the formation of an LLC by registering articles of organization or a similar document with the state and creating an operating agreement to govern member decisions, including how they share profits and losses of the business.
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