Incorporating your business can admittedly be a stressful and confusing process, even more so if you are doing it for the first time. With so many different structures to choose from, each with their own limitations and benefits, it can be difficult track of all the pros and cons. This handy guide will help you learn the basics of corporate structure. Remember, it is always helpful to consult with an attorney, accountant, or business filing professional before making a final decision.
If you’ve narrowed down your options to a C corp, an S corp, or an LLC, read ahead for more information that will help you decide the best option for you.
The C corp
The C corporation (C corp) is what most people think of when they hear the word “corporation”. This is largely due to the fact that all large, publicly traded businesses typically adopt this structure. Filing as a C corp provides business owners (or stockholders) with the greatest level of personal asset protection. Setting up a C corp requires the most formal paperwork, as well as many ongoing formal processes.
Filing as a C corp might be the right choice for you if you have hopes of raising any venture capital or distributing publicly traded stock, as this is typically the only structure that allows for these types of financing. The necessarily strict accounting requirements can be difficult to comply with, but also allow for a greater ability to legally “write off” various expenses. These write-offs can positively impact your taxes. C corps are also easier to sell off, due to their highly organized and formal nature. So if your goal is to develop an idea and then build a successful company to sell at a profit, a C corp may be the best structural choice.
Some smaller (or even mid-sized) businesses may find the amount of paperwork, fees, and organizational effort required to run a C corp to be overwhelming, making the choice of an S corp inefficient. If you anticipate your business to remain a small company or startup, it might be advisable to choose a different structure, making the switch to a C corp later on down the road if necessary.
The S Corp
The S corporation is actually a variation of the traditional C corp, with a few notable differences. Running an S corp still requires a great deal of organization and paperwork, but results in a different tax structure. S corps are also governed by a strict limit of 100 different shareholders (or owners). All shareholders and/or owners must be U.S. citizens.
Instead of paying income tax as an organization, earnings and losses “pass through” the business, and are paid at the personal level by each owner. This is often the primary reason that an S corp is formed, as pass through taxation can have substantial financial benefits. Pass through taxation also makes an S corp an ideal structure for larger companies that have no interest in going truly “public”.
The limitations on ownership, combined with the great deal of regulations, make the S corp structure ideal for companies comfortable with a larger administrative workload.
The LLC (limited liability company) is a relatively new corporate structure, but is quickly becoming the most popular. This is due to the fact that (when run correctly) an LLC provides many of the asset protection benefits of a corporation, while being taxed like a partnership, and forgoes many of the formalities required in other corporate structures. The main appeal of an LLC is that it provides smaller entities many of the same benefits that were previously only granted to large organizations.
LLCs are taxed at the personal level; all income taxes are imposed on individual owners. LLCs do not have any of the formal administrative requirements of the larger corporate structures (e.g. yearly shareholder meetings and specific organizational requirements), and can have any number of properly registered partners. However, an S corp cannot raise funds by issuing stock of any variety or through venture capital.
The most common reason that smaller businesses form as an LLC is personal asset protection. If an LLC is run correctly, business owners will not be held liable for any legal action taken against the organization or for any debts accrued by the business. However, it should be noted that if an LLC is being run against the spirit of the guidelines and regulations laid out for it, a judge could justifiably waive these protections.
Swyft can help!
If you have more questions about the distinctions between a C corp, an S corp, and an LLC, the professionals at Swyft can help.Contact one of our experienced professionals today!