What Type of Corporation Works for Small Businesses?

Small businesses are owned and operated privately, with a relatively low volume of sales and a small number of employees. United States small business standards vary by state, as well as on an industry-by-industry business. Small businesses are becoming increasingly popular due to the ease of operation, because of the COVID-19 pandemic, and because there are certain tax deductions for small businesses that are commonly available.

Generally speaking, a small business is defined as having less than 500 employees for manufacturing industries, and less than $7 million in annual income for non-manufacturing industries. Small businesses often take the form of a corporation, partnership, or sole proprietorship.

Small businesses can also file for incorporation, which will allow the business to operate as its own legal entity. Doing so may also provide various protections for business owners and shareholders, as corporations are considered to be “people.” However, as there is no set formula for choosing a form of corporation for small businesses, you will need to consider all of the needs of your business in order to ensure that the right type of corporation is being selected.

What Are Some Common Types Of Corporation?

There are a number of different types of corporations. Some of the most common corporation forms used by small businesses may include:

• Professional Corporation: A professional corporation is a specific type of corporation which allows individuals who are members of the same field to associate with one another for a specific purpose. Professional corporations may be chosen as a structure for incorporating a business because of its association with certain benefits, namely limitations on member liability, as well as various tax breaks.
  • Professional corporations are generally identified by the firm placing the letters “P.C.” or “PC” after listing their firm name. This specific type of corporation can sometimes be subject to different regulatory laws when compared to other types of corporations;
• Close Corporation: A close corporation is defined as a corporation that is owned by a limited number of stockholders. Laws governing close corporation requirements vary from state to state; in general, laws limit close corporations to only 35 shareholders. Close corporations are often made up of family members and/or friends, and the members are generally active in the day-to-day affairs of the business. Most state laws allow close corporations to operate less formally when compared to other types of corporations. An example of this would be how close corporation members occasionally can make decisions without needing to have a formal meeting with the board of directors.
  • However, in order to access the benefits associated with close corporation status, the organization must adhere to all of the requirements for closed corporation formation in the state that the corporation is incorporated in. Additionally, the treatment of stocks differs in a close corporation than in other corporations. Because of shareholder agreements that are frequently present among shareholders of close corporations, shareholders generally have much more control in terms of how stocks are bought, sold, and/or resold. Close corporations are generally prohibited from making public offerings of their stock;
• Non-profit Corporation: In general, non-profit corporations are organized and structured similar to regular corporations. The defining difference between non-profit corporations and regular corporations would be that nonprofits exist in order to fulfill a non-monetary purpose, whereas regular corporations exist only to make money.
  • Non-profits also differ because they have tax-exempt status, and as such they are eligible for governmental and private funding. A non-profit is not required to pay any federal or state income taxes for any activities related to its stated purpose. Additionally, private parties who donate or make contributions to a non-profit corporation receive a tax deduction in exchange for doing so; and/or
• Foreign Corporation: A foreign corporation is incorporated in one state, but is also authorized to conduct business in one or more other states. An example of this would be how a corporation may be formally registered in Delaware, but would be authorized to also do business in California, Florida, and Texas. While this corporation would be considered a “domestic corporation” in Delaware, it would be considered a “foreign corporation” for its operations in the other states.
  • The term “foreign corporation” may sometimes be used to describe an international company abroad that is conducting business in the United States. However, the term is most frequently used to refer to American businesses that are operating in several different states. Foreign corporations may sometimes be called “out-of-state” corporations.

What Is A Limited Liability Company (“LLC”)?

Many corporations choose to file as a limited liability company, or an LLC. According to the law, if someone files a lawsuit against a corporation and the suit is successful, the corporation pays money out of the corporation’s assets. Meaning, the individual members’ and owners’ own assets are not “touched.” The owners of the corporation are not personally liable for the corporation’s debts, nor for damages that are awarded against it in a lawsuit.

However, one of the disadvantages of a corporation is “double taxation.” What this means is that corporate profits are first taxed to the corporation as they are earned, and are then taxed to shareholders as capital gains income when the shareholders receive dividends. A limited liability company offers the advantages of a corporation in that the owners’ individual assets are shielded from creditors and legal claims made against the LLC.

There are other ways in which LLCs are different from other common business entities. Limited liability companies differ from corporations in terms of ownership structure. LLCs are owned by individuals, while corporations are owned by shareholders.

In terms of liability, LLCs differ from both partnerships and sole proprietorships. Partners in a partnership are personally liable for debts incurred by the partnership, including debts incurred by another partner. What this means is that if a partnership owes money to a creditor, the creditor can pursue the individuals’ own individual real and personal property in order to satisfy the debt. In general, LLC owners are not personally liable for liabilities or debts that are incurred by the LLC. This is what allows for LLC owners to manage the business without worrying about losing their own assets.

In addition, LLCs are similar to partnerships in that they are not taxed at the “entity level.” What this means is that unlike corporations, they do not pay taxes as an LLC. The only taxes are paid by individual members who have earned profit. Additionally, although similar to a corporation, an LLC is considerably less difficult to register. An example of this would be how LLC’s are often associated with similar liability protections as a corporation, and they may also allow for very specific tax-related incentives.

Many states require that a document known as an initial information statement be filed, within a ninety-day period of the filing of the articles of organization. This statement must provide the names and addresses of LLC members and managers. Additionally, the LLC must provide a fee to the Secretary of State.

An additional statement of information must be filed periodically, generally every one or two years. If any information included in the initial statement has changed, the new information should be included in subsequent filings. Some states require LLCs to pay franchise taxes, which are filed with the state’s Franchise Tax Board (“FTB”). If they have employees, LLCs must also pay state and federal employment taxes, as well as unemployment insurance taxes. Finally, LLCs must collect and pay sales taxes.

Do I Need An Attorney For My Small Business?

If you are a small business owner who is considering incorporation, you should work with an experienced and local corporate lawyer.

An attorney can assist you in determining your best options according to your state’s specific business and corporation laws. Finally, an attorney can also represent you in court, as needed, should any legal issues arise.