Are you starting a new business, or reorganizing your current business? Let us help you determine the most appropriate business entity to form:
Corporations, S-Corporations, LLC’s or a Professional Corporation.
Corporation (C Corporation)
A C corporation is legally independent and not a personal tax liability for its owners. Its structure is more complicated than a limited liability company, and has a board of directors and shareholders.
Owners are not personally liable for the company’s losses or debts, so your investment in the company is your only financial risk. A C corporation is the only business structure where the net income of the company is taxed at the corporate level before it is distributed to the owners or shareholders. Owners and shareholders must also pay personal income tax on the distributions.
Depending on your business income, C corporations may lower your tax rate. C corporations are entitled to numerous deductions, which can reduce your business income significantly.
Advantages of a C corporation are they include shareholders, you can take the company public, and you can also issue stock or stock options to employees. The board carries on the company, not the owner, so a corporation can last longer than an owner-based company such as an LLC.
The downside to C corporations is that they are more complicated tax-wise and are taxed at the corporate level and personal level.
Small Business Corporation (S Corporation)
A small business corporation allows the taxation of your company to be similar to a partnership or sole proprietor as opposed to paying taxes based on a corporate structure.
An S corporation is similar to a LLC in that the profits and losses of the business pass through to the corporation owner’s personal income tax, allowing you to avoid double taxation.
When starting your business you will have many expenses and losses which can be offset against your personal income, whereas in a regular corporation the losses are locked within the company and not applied to your income.
If you are considering selling your business as part of your retirement, an S corporation could have reduced taxable gains when you sell the business. S corporations do not offer complete liability protection, as you can be held personally liable for your actions.
You should consider that an S corporation limits your business to issuing one class of stock, which gives you less control and limits on stock value. If you need venture capital, a regular corporation structure is a better choice, which has fewer limitations. With an S corporation you avoid corporate taxes, but you will still have to file a tax return each year.
When building your business plan, consider that an S corporation requires regular meetings and maintain company minutes.
Limited Liability Company (LLC)
A limited liability company is a type of business ownership that combines several features of corporation and partnership structures. Owners of a LLC are called members and there may be an unlimited number of members (individuals, corporations, or other LLC’s).
An LLC exists as a separate entity and owners have the liability protection of a corporation. Members cannot be held personally liable for debts unless they have signed a personal guarantee. LLC’s provide flexibility in the distribution of profits, whereas common partnerships split profits 50-50.
All business losses, profits, and expenses flow through the company to individual members, which allows you to avoid the double taxation of paying corporate tax and individual tax. An LLC business structure does not require formal minutes, meetings, and recorded resolutions, as corporations do.
There are a couple of disadvantages to LLC’s to consider. Corporations may be permanent whereas an LLC will dissolve when a member dies or undergoes bankruptcy. If you plan to take your company public or issue employee shares in the future, it may be best to develop a corporate business structure.
Professional Corporation (PC)
A professional corporation is a corporation of professionals. Types of professions that form a PC include doctors, chiropractors, lawyers, accountants, architects, etc.
In a C corporation, the shareholders are free from personal liability but in a PC, the professionals are personally liable for their own professional actions, but are protected from the actions of another. A PC is taxed like a C corporation, unless you make an S corporation election.
Free Consultation
Receive a free 30 minute consultation. During your consultation Gregory S. Duncan will review your legal issue and discuss the best course of action. All communication is held in the strictest confidence.
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