There are many available corporate structures; some good, some not so good.Choosing the right corporate structure is critical to the success of your business. If you choose the wrong corporate structure, you could severely hurt your ability to establish corporate credit. It could also impact how much personal liability you have within your company. Let's review the different types of business structures available today to see which may be the best fit for your company.
LLCs (limited liability companies) are one of the newest and most popular forms of business structures. It is considered an incorporated company structure and therefore, a separate legal entity. LLCs are filed at the state level with the Secretary of State. This business structure is a cross between a corporation and a limited partnership. You do not need a partner to be filed as an LLC. LLCs are easy to file and easy to maintain year to year. There are no board meetings required or corporate minutes to maintain. You simply file an annual report with the Secretary of State when you pay your annual renewal fees, and relist the corporate officers. (Even if there have been no changes over the previous year.) LLCs are not taxed at the entity level. Instead, the taxes are passed through to the individual shareholders and are assessed based on the annual dividends of the shareholders. The taxes are then paid by the shareholders on their individual tax returns.
This makes paying your company taxes very easy. If you are the sole owner of your LLC, you will pay your corporate taxes based on your net profits (dividends), and do so via your personal tax return under capital gains. LLCs provide legal protection from personal liability, just like corporations. Your liability is limited to the dollar amount you have invested in the LLC. The cost of filing and maintaining an LLC is generally less than other types of incorporated businesses. I highly recommend this type of filing if your company is going to have twenty or fewer employees. For liability protection, tax advantages, costs, and ease of use, you will be well served with this type of corporate structure. The only real drawback to an LLC filing is that an LLC can not be a publicly-traded company. If you want to someday appear on NASDAQ, then this is not the corporate structure for you. That aside, an LLC could be the right choice for you and your company.
A corporation (C-Corp) is a company structure that is a legal entity separate from the business owner(s). Operating under its own name, it has the legal authority by state law to act as a legal entity. With C-Corps, you will be required to maintain a board of directors, hold quarterly board meetings, and document the minutes from those board meetings. C-Corps are taxed both at the entity level and again through the individual share-holders on dividends paid to them annually. Thus, C-Corps face double taxation; once at the entity level, and again as a shareholder in the form of dividends. This double taxation can be offset with by-laws written into the Articles of Incorporation when the C-Corp is initially filed. For example, let’s say you are operating a home-based business and are filed as a C-Corp. You can add by-laws to your Articles of Incorporation that state the C-Corp will cover all your business operating expenses. Therefore, your mortgage/rent, utility bills, phone, internet, cable expenses, etc. can all be debts assumed by the C-Corp. Your operating expenses are then absorbed by the C-Corp before you show any profits the C-Corp earns. Since you only pay taxes based on company profits, your overall tax burden is reduced, based on the C-Corp’s legal authority to assume your operating expenses. Another advantage of C-Corps is that they can be a publicly-traded company.
S-Corps are almost identical to C-Corp filings, with one major exception. They are not taxed at the entity/corporate level. They have a special tax designation under subchapter S of the Internal Revenue Code. Like LLCs, they do not face double taxation. Taxes are paid instead through the shareholders, based on their share of the annual dividends, and are filed via the shareholders' individual tax returns. To take a subchapter (S) election, your corporation must be owned by individual(s), and not a trust. Total shareholders must be less than 100. Family members combined count as one shareholder. Thus, you can have up to 98 nonfamily member shareholders and still take this election. You must file for this election with the IRS within 75 days of your incorporation filing date. To take this election, complete IRS form 2553, and either mail or fax the completed form to the IRS. You can obtain this form by visiting the IRS website at www.irs.gov. Use their form “search engine,” and type in 2553. Download and print a copy to be completed manually. This three-page form is rather simple and will take less than five minutes to complete. Like C-Corps, they are a separate legal entity and provide full liability protection from corporate debts. S-Corps can also be a publicly-traded company, just like a C-Corp. If double taxation is a concern for you, then this corporate structure might be the ideal type for your company.