The type of business you choose will influence all aspects of your day-to-day operations. Taxes and personal assets will be affected by the business structure you choose. You should choose a business structure that balances legal protections and benefits.
Selecting the type of corporation for your business is a major decision. There are many different types of corporations to choose from. Each of these forms is associated with various filing requirements, tax consequences, and liability implications. Some common choices of corporations for businesses include:
- Professional Corporations: This is a corporation made up of many different licensed professionals practicing in a given field such as law, architecture, medicine, etc.
- C or S Corporations: These are standard corporation forms. “C” corporations mean that the taxes are processed mostly through the corporation; “S” corporations indicate that the shareholders are more directly involved in tax issues.
- Close Corporations: This is where very few individuals hold ownership and control of the corporation.
- Non-Profit Corporations: Many groups choose this type of corporation if they are engaged in charitable activities.
- Thus, the type of corporation you select may affect your company’s different advantages and disadvantages. This is especially true with regard to corporate tax laws.
Your business structure will affect how much you pay in taxes, your ability to raise money, the type of paperwork you need to file, and the amount of personal liability you will have. You may convert to a different business structure in the future, but there may be restrictions based on your state’s laws. This could result in tax consequences, among other complications. Consult with a business attorney for help with your decision.
What Is a “Delaware Corporation”?
Some states have laws that are more favorable to corporations than the laws of other states. These states are often called “corporate haven” states. An example of such a state is that of Delaware. For instance, corporations that file for registration in the state of Delaware may experience differences in the way that they are taxed.
Thus, a company that is filed in the state of Delaware is known as a “Delaware corporation.” Delaware corporations don’t need to restrict their activities only to the state of Delaware. They may conduct their business elsewhere but can still reap the benefits of being incorporated in the state of Delaware.
What is a Sole Proprietorship?
Sole proprietorships are easy to form. They give you complete control of your business. Your business is automatically considered to be a sole proprietorship if you do business activities but don’t register as another kind of business.
Sole proprietorships do not create a separate business entity, meaning your business assets and liabilities are not separate from your personal assets and liabilities. You could be held personally liable for the business’s debts and obligations. Sole proprietorships often have difficulty raising money because they can’t sell stock. For this reason, banks are hesitant to lend money to sole proprietorships.
Sole proprietorships may be good choices for low-risk business owners who want to test their business ideas before forming a formal business.
What is a Partnership?
Partnerships are the simplest way for two or more people to own a business together.
There are two kinds of partnerships: limited partnerships and limited liability partnerships.
In limited partnerships, one partner has unlimited liability and all other partners have limited liability. The partners with limited liability also tend to have limited control over the company. This is outlined in a partnership agreement. Profits are passed through personal tax returns. The general partner without limited liability must also pay self-employment taxes.
Limited liability partnerships are closely related to limited partnerships, but they give limited liability to every owner. Limited liability partnerships protect each partner against the debts of the partnership, meaning partners won’t be responsible for the actions of other partners.
Partnerships are good choices for businesses with multiple owners, such as attorneys.
What is a Limited Liability Company (LLC)?
Limited liability companies (LLCs) are popular because they allow you to take advantage of the benefits of both a corporation and a partnership.
LLCs protect you from personal liability in most circumstances. Personal assets, such as vehicles, houses, and bank accounts, won’t be at risk in case the LLC faces lawsuits or bankruptcy.
Profits and losses can be passed through to your personal income without facing corporate taxes. However, members of LLCs are considered self-employed and must pay self-employment taxes toward Medicare and Social Security.
LLCs have a limited lifespan in some states. When a member joins or leaves an LLC, many states require the LLC to dissolve and reform itself with new membership unless there’s already an agreement in place for the LLC to transfer ownership.
LLCs are good choices for owners with significant personal assets that they’d like to protect or for owners who want to pay lower tax rates than they would with a corporation.
What is a Corporation?
Corporations are legal entities that are separate from their owners. They can make profits, be taxed, and be held legally liable.
Corporations offer the strongest protections to their owners from personal liability, but the cost to form a corporation is higher than other businesses. Such business forms also require extensive record-keeping, operational procedures, and reporting.
Corporations pay income taxes on their profits, unlike sole proprietorships, partnerships, and LLCs. Corporations may be taxed twice on their profits – first, when the company makes a profit, and again when dividends are paid out to shareholders on their personal tax returns.
A corporation has a life span completely separate from their shareholders. If shareholders leave the company or sell shares, the corporation can continue doing business.
Corporations have advantages when it comes to raising capital because they can raise funds through the sales of stock. This benefit may also attract employees. Corporations that need money or plan to go public can eventually be sold.
What are Nonprofit Corporations?
Nonprofit corporations are designed to do charity, educational, religious, or scientific work. Since their work benefits the public, nonprofit organizations receive tax-exempt status, meaning they don’t have to pay state or federal income taxes on any profits.
Nonprofits must file with the IRS to get tax exemptions. They also must follow organizational rules similar to regular corporations. They have to follow special rules about what they do with any profits they earn. Nonprofits cannot distribute profits to members or donate to political campaigns.
Do All Businesses Need to Incorporate?
No- some business owners may find that the incorporation process is too cumbersome for their company. This is especially true for smaller businesses. For instance, a smaller organization may choose to register as a partnership rather than a corporation. This can allow the organization to begin operations more quickly than if it had registered as a corporation.
Should I Hire a Lawyer to Help with Corporation Issues?
It may be necessary to hire a corporate lawyer if you need assistance with any legal issues involved with incorporation. Your attorney can provide you with legal advice and guidance on how to file for incorporation. Also, your lawyer can provide you with advice on the different types of corporations. If you have any legal disputes or contests, your lawyer can provide you with representation if you need to file a lawsuit.