What Is The Best Type Of Company For You To Legally Set Up?
This is a business entity where the owner takes on full responsibility with debt, legal actions, and income tax. There is no corporate tax, but also the lack of limited liability that other entities enjoy. They usually are able to create a trade name so they can operate as a business name instead of themselves.
Upside-This is a great way to avoid the formalities of business meetings to decide on legal issues for the business. It tends to be easier tax returns and no formal way of canceling the business. All profits go straight to the owner and there are very little government regulations. You don’t have to worry about quarterly and annual payroll reports.
Downside- Good luck being considered legitimate in the business world. It will be hard to get capital from any investors. It is also difficult to get any employees because the business is not stable. The owner is responsible for health insurance and as soon as the owner decides to get rid of the business or dies then it is gone and so are the jobs. That isn’t too appealing. If you start going somewhere with this sole proprietorship, then you are going to have to move up to an LLC.
Limited Liability Company (LLC)-
A Limited Liability Company is as it says it is, limited liability for the owners legally. They tend to be created for smaller businesses. They have the same issue of being disregarded by other businesses when created by a single individual just like a sole proprietorship. When it comes to taxes for the federal government many LLC’s will register as a C corporation or preferably a S corporation.
LLCs are organized with a document called the “articles of organization” approved by the state. It is common for an LLC to have an operating agreement privately specified by the members. The operating agreement is a contract among the members of a LLC governing the management, membership, operation, purpose and distribution of income of the company. Either you can organize as member management or manage management. Manage management is two-tiered and recommended if you decide to go corporate.
Upside- No annual shareholder meetings, no loss of power to board of directors, and not as much paperwork or recordkeeping. No double taxation unless you decide to be taxed as a corporation. Members, which are the owners, are not targeted in case of lawsuits, actions, and debts, while that goes to the business itself. It allows you to be taxed as a S-corp, individual, sole proprietorship, or an LLC. Profits and responsibilities can be delegated without people having to be awarded membership.
Downside-It is harder to find investors because they are probably looking toward a corporation that will allow for eventual IPOs. Franchise taxes are necessary in several states. You tend to run into problems without the influence of a board of directors. Most LLCs are looked down on as novices. There are blurry ideas as far as possible positions for an LLC and who is able to make contracts, decisions and representations.
S Corporation (S-Corp)-
This is basically a corporation, but I am focusing on this type because this is the most commonly used and discussed. Part of the reason why this is the case is that a S-Corp can be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. This is important because the corporation pays no income tax on the profits. Instead that is the responsibility of the shareholders. Whereas a c-corp pays both.
To be eligible the company must exist as a domestic corporation or a LLC of some kind. There are other requirements like having to be American citizens, but these requirements aren’t so difficult. When these are met you can fill out the 2553 tax form to create an “Election by a small business corporation”. This must be done within 75 days after the beginning of the tax year for which the election is to take effect. If any laws are broken then the S-corp will return back to a C-corp.
Pros-C-corps get taxed on profits at corporate rates and then shareholders at personal rates, while a S-corp is taxed at personal rates to the shareholders. This can mean more money kept by the owners. They provide protection for individual shareholders legally. An s-corp makes it easier for you to establish IPO for your company. It is easier to conduct business, impress other companies, and can be created in 24 hours.
Cons- Required to perform board of director meetings and annual reports like a C-corp. There are going to be more taxes so get a CPA to take care of the additional books you will have. Unfortunately, they can’t deduct benefits, such as health insurance for any shareholder earnings more than 2%. They can’t own subsidiaries and can’t retain earnings no matter how distributed.
If you liked this post then make sure to subscribe to Write To Right for more information on starting a successful business.
Filed Under Starting A Business |
Tagged With C-corporation, Corporation, income-tax, L.L.C., legal-action, Limited-Liability-Company, S-corporation, Sole-Proprietorship, Subchapter-S
Related Posts:
How Do You Put Together Articles Of OrganizationInc. Paradise
How To Create A Successful Public Relations Campaign?
Preservation Of Wood
What Is The Best Business Loan For My Small Business?
This is just amazing! Thanks for all that information. Im just going to pen my company and thanks to you I have my ideas cleared.