One of the first decisions to make when setting up a new business is which company structure to use. Each structure has pros and cons. A structure may be ideal for one type of business but completely inadvisable for a different industry. Each different structure has its own personal asset protection, tax, and operational implications. Understanding these implications and how they will affect your business is undeniably important to your company’s overall success.
With that in mind, we’ve put together a quick look at the benefits and limitations of structure. However, there is no way to replace the experience and in-depth understanding that a dedicated filing professional can provide. Do not hesitate to ask for help when deciding which structure is right for both you and your business.
A C corp is what most people think of when they hear the word “corporation”. Most large companies are filed under this structure, as it offers the most asset protection and tax related options for business owners. It is also typically the only choice for owners that would like to be taxed separately from their company.
Choosing the C corp structure for your business isn’t the best choice for everyone. Filing as a C corp requires a great deal of paperwork, as well as formal processes that must be carefully and regularly filed. C corps are often also much more closely monitored than other types of businesses, due to the fact that they are one of two types of corporations that can issue stock to the public.
An S corp is very similar to a C corp in that it provides a great deal of asset protection and tax options for business owners. It is also the only other structure that can offer stock to the public, but in a much more controlled and limited manner than a C Corp.
There are a few differences between an S Corp and C Corp. Most notably, owners of a S Corp can claim operational losses as part of their personal income should the business fail to turn a profit. In addition, all business owners of S Corps must be U.S. citizens, which can limit international growth.
Limited liability company (LLC)
A limited liability company is quickly becoming the most common form of incorporation. It is a relatively flexible structure that provides many of the benefits of a partnership or sole-proprietorship, with some of the protections provided by C corps and S corps. LLCs do not necessitate many of the formal processes required by other types of corporations.
However, LLCs are unable to offer stock to the public and are still required to keep a fair amount of internal paperwork. LLCs do still require an owner to follow filing regulations. Companies that abuse the flexibility offered by filing as an LLC can lose their personal liability protection, in a process called “piercing the corporate veil”. If this happens, business owners can retroactively be held liable to pay corporate debts with personal funds.
A general partnership is considered to be a rather informal business structure. General partnerships allow for an unlimited number of business owners or, as they are quite logically called, “partners”. Under this structure, a business cannot issue any type of stock, and partners are held personally liable for any taxes or debts. It provides no legal separation between individual assets and business assets. General partnerships can “expire” causing a need to periodically re-file.
A sole proprietorship is almost identical to a general partnership, except that it can only have one owner on file. The owner of a sole proprietorship will be held liable for absolutely all tax or debt that the business accrues. It also offers no protection of personal assets. As is the case for general partnerships, sole proprietorships also expire, requiring a periodic refiling.
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