After making the exciting decision to incorporate your business, you’ll immediately be faced with another more difficult choice: what is the ideal corporate structure for your company? While there are numerous factors to consider as you make this decision, a good first step is to decide whether or not to file as an LLC or as a more traditional corporate structure. This guide will help point you in the right direction.
Incorporation basics
The incorporation process allows business owners to create a layer of separation between themselves and their company. Upon successfully filing as a corporation, your state will begin to recognize your business as a legal and financial entity apart from yourself, which carries several benefits. It’s possible to start a business as a corporation, or convert an existing company into one.
There are different types of corporate structures, all with benefits and limitations. Typically, the first thing you’ll want to do is differentiate whether you’ll want to form as an LLC (limited liability company) or more formal corporate structure, (either a C corp or S corp). While any of these three structures lend credibility to your company, as well as personal asset protection, they each have unique aspects that must be taken into account when making the decision.
LLC or Corporation – What’s the difference?
Your choice of business structure (LLC, C corp, or S corp) will have a huge impact, both in the short term and long term, affecting both your overall tax expenses, as well as a your day-to-day administrative workload. Choosing the right structure is integral to your company’s success; make sure that you aren’t wasting your hard earned revenue or valuable time.
The LLC
As with all corporate structures, forming as an LLC will prevent your personal assets from seizure if your company owes debts or is the subject of legal action. Above all else, this is the greatest benefit of becoming a corporation. However, the LLC structure has a few unique benefits, as well as limitations.
Compared to other corporate structures, the LLC offers the most flexible management options and requires the least amount of official formalities. Operating an LLC requires less paperwork, less documentation of meetings and daily operations, and less administrative effort. S corps and C corps have more stringent operating conditions.
LLC’s also aren’t taxed at the corporate level; instead, all profits and losses are imposed on the personal income taxes of each individual owner. This practice is called “pass through” taxation. More often than not, this will have favorable implications on your after tax earnings, especially in the case of a smaller organization.
However, there is a trade off when taking advantage of the structural flexibility of an LLCs. If it’s found that your organization is operating outside of the spirit of a corporation, you can be held personally liable for debts or legal issues in a judicial process called “piercing the corporate veil”. An LLC can also never attempt to sell any kind of stock, and typically won’t be granted any type of venture capital.
Corporate structures
C corps and S corps are considered to be more traditional and formal corporate structures than LLC’s. They are typically much more “iron clad” in the asset and legal protection they offer, largely due to the fact that they are more closely monitored than other types of businesses. While S corps and C corps do have similarities, they are also very different from one another. It is important to understand the intricacies of these structures so that you can choose which would be most beneficial for your company.
C corp
— what people typically think of when the word “corporation” comes up. This is because most of the world’s largest companies fall under this structure, and for good reason. C corps are the only business type that can sell publicly traded stock. As a result, they are required to hold annual shareholder and management meetings, documenting them for liability's sake. This regulated documentation can be an extremely resource intensive process, which can make it tough for smaller organizations to operate under this structure. Their formal nature, and ability to sell equity, makes C corps the primary investment choice for venture capitalists and other financing organizations. C corp owners are also typically double taxed, once as a corporation and once as an individual. However, when run effectively, C corps are usually able to offset this with a much greater profit due to the advantage of higher capital levels.
S corp
— considered the middle ground between the formalities of a C corp and the flexibility provided by an LLC. Much like an LLC, they are able to take advantage of “pass through” taxation. They also have the added benefit of allowing entrepreneurs to receive savings on the self-employment tax and other taxes associated with public welfare programs, such as Social Security and Medicare. S corps do face a unique set of limitations. While they can distribute stock, they are limited to only 100 shareholders. S corps cannot have any owners that are not residents of the United States, which places some serious restrictions to international organizations. They cannot be part owned by trusts or subsidiary companies. These ownership restrictions do not exist for LLCs or C corps.
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