Originally published on fooyoh.com
Starting a new business often includes creating a new corporate entity to own and manage the business. Corporate structure for many small businesses is preferable to a sole proprietorship or a simple partnership for many reasons. In this article, Michael Evan Salley discusses general options for corporate structures and some of the strengths and weaknesses of each.
A corporation is a legal entity created according to the statutory rules of each U.S. state. Generally, in every state, a corporation is considered a completely separate legal entity from any of its owners.
Corporations have several advantages over ordinary proprietorships or partnerships. Shareholders (the owners) of corporations are not normally liable for the debts or any legal obligations or judgments against the corporation. The general rule is that only assets invested in the corporation are at risk for the acts of the corporation.
Selling some ownership in a corporation through issuing and selling stock is also much easier than selling an interest in a proprietorship or partnership. Corporate stock lives beyond the lives of the shareholders and can be passed on to family members while allowing the business to continue.
There are some expenses and overhead involved with corporations that proprietorships and partnerships do not have to deal with. Forming a corporation requires time and some start-up expenditures, which vary from state to state. Maintaining corporate structure also requires ongoing paperwork and filing with the corporation’s home state Secretary of State at least annually. Corporations also must usually have a board of directors and a set of corporate officers.
The Difference Between a C Corporation and an S Corporation
Designation as a “C” or an “S” corporation is a distinction made by the IRS and state taxing authorities. C corporations are deemed to be separate taxable entities for income tax purposes, and C corporations file and pay separate corporate taxes on the income earned by the corporation. S corporations do not pay a separate corporate income tax. Rather, the owners of the S corporations report the income of the corporation as personal income on their personal returns.
You should consult with your tax professional for more information and advice on electing tax treatment as either a C corporation or as an S corporation.
Limited Liability Companies
Limited Liability Companies (LLCs) have become very popular in the last few years. LLCs are intended to provide small businesses with the greatest benefits of both corporate firms and sole proprietorships/partnerships.
Like corporations, LLCs provide limited liability to the company’s owners, whereby the owners are not normally responsible for the debts and liabilities of the company. Unlike corporations, LLCs do not have a high level of formality regarding officers and directors. Subject to the company’s agreement between the owners of the company, an LLC operates in a day-to-day manner more like a partnership or proprietorship. LLCs also have lower levels of reporting obligations to the state than corporations normally do.
Depending on the state where the LLC is located, some tax obligations may be more complicated with an LLC compared to ordinary corporations. A transfer of ownership in an LLC is also more complicated than it is with ordinary corporations.
Michael Evan Salley added, “Every new business owner should consider the best type of corporate structure for their particular business and industry. Appropriate legal and tax advice can help streamline the process and save lots of time later in the process.”
Michael Evan Salley is a results-driven individual who takes pride in performing his job with excellence every time. He is organized, driven, and has experience managing teams and solving problems. He has a Master of Construction Science and Management and ground-level experience.
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