Trying to
incorporate your business can be a little intimidating when you’re not equipped with the basics of the process. There are seven entities in the business structure and they all come with benefits and drawbacks.
Michael Oates a certified public accountant and tax principal with Rothstein Kass-Certified Public Accountants , one of the top 20 largest international accounting and consulting firm based in the
U.S. says, “Figuring out the type of business to open is only half the battle of an entrepreneur. Your choice of business structure will largely determine how your business income will be taxed. The most popular and familiar legal forms of business are C corporations, S corporations and Limited Liability Companies (LLCs).”
“These may look like just a few simple words on a page, but they could mean thousands of dollars to your bottom line. Many business owners choose S corporations because they provide limited liability, income flow-through to their individual income tax returns and tax-free merger benefits. But like other business structures, S corporations have their disadvantages. If you already have or intend to elect this entity or any other entity, you should understand how they are structured so you can establish a financial plan.”(Inc.com)
According to BizStats.com for the year 2000, U.S. business entities collectively posted over $20 trillion in annual revenue. The number of Sole Proprietorships formed where up 1.9%, Corporations up by 2.2%, Partnerships down 0.6% and Limited Liability Companies where up 21.9%. Be sure to consider these stats when you
incorporate your business.
Sole Proprietorship
easiest to establish
owned and operated by an individual (can have only one owner)
most states do not charge a filing fee
owner and business are considered one and the same (no differentiation between owner’s personal assets and assets of the business)
owner’s personal assets could be required to help pay off business debts
owner can do business under the owners name or apply for a DBA (doing business as), fictitous name, or assumed name which allows the business to perform under a different name (ex. Taylor Printing as apposed to Richard Taylor) DBA’s can be attained at the County Court House
profits or losses of the business are reported on the owners tax return
more difficult to secure capital through lending institutions which usually demand more formal entity structure
General Partnership
easy to establish
owned by two or more people (by means of written or oral agreement)
most states do not charge a filing fee
owners’ personal assets and assets of the business are one and the same (no differentiation between owner’ personal assets and assets of the business)
owners’ personal assets could be required to help pay off business debts
may file a DBA to differentiate between owners’ names and the business name
partners are typically responsible for the business-related actions of the other partners
more difficult to secure capital through lending institutions which usually demand more formal entity structure
C Corporation
most common corporate structure
articles of incorporation or certificate of incorporation must be filed with appropriate state agency and ongoing state requirements and filing fees do exist
separate legal entity owned by shareholders (shareholders cannot be held personally responsible for the debts of the corporation and the shareholder’s personal liability is usually limited to the amount the shareholder has invested in the company)
shareholders of C corporations may experience double taxation (corporate profits are taxed at the entity level first then if the corporation distributes a portion of remaining profits to shareholders the shareholder must report the dividend as personal income and pay taxes on it as an individual)
unlimited number of shareholders
ownership is easily transferable through the sale of stock
unlimited life extending beyond the illness or death of owners
certain business expenses may be tax-deductible
additional capital can be raised by selling shares of the corporation's stock
ongoing corporate formalities, such as holding and properly documenting annual meetings of directors and shareholders
S Corporation
more expensive to form
articles of incorporation or certificate of incorporation must be filed with appropriate state agency and ongoing state requirements and filing fees do exist
elects a special tax status with the Internal Revenue Service (IRS) which eliminates the possibility of double taxation common to C corporations
corporate income tax return is filed but no tax is paid at the entity level (profits or losses of the corporation are "passed-through" to the shareholders and are reported on their individual tax returns)
Shareholders are typically not personally responsible for the debts and liabilities of the business
unlimited life extending beyond the illness or death of owners
certain business expenses may be tax-deductible
capital can be raised by selling shares of the corporation's stock
shareholders must number fewer than 100; must be individuals, estates, or certain qualified trusts; and cannot be non-resident aliens
only one class of stock (disregarding voting rights of shareholders and all shareholders must consent in writing to the S corporation election)
ongoing corporate formalities, such as holding and properly documenting annual meetings of directors and shareholders
Limited Liability Company (LLC)
more expensive to form
provides both limited liability protection and pass-through taxation (a tax return for the LLC must be completed)
articles of organization or certificate of organization, must be filed with the appropriate state agency and the necessary state filing fees paid
any income or loss of the LLC as shown on this return is passed through to the owners (owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax)
legally exists as a separate entity from its owners (owners cannot typically be held personally responsible for the debts and liabilities of the LLC)
generally have no restrictions on the number of members allowed
members have flexibility in structuring the management of the company
does not require as much annual paperwork or have as many formalities as C corporations and S corporations
ownership is typically harder to transfer than with a corporation
Nonprofit Corporation
more expensive to form that unincorporated entities
formed for purposes other than making a profit
pursuant to different state laws than standard for-profit corporations
nonprofit articles of incorporation must be filed with the appropriate state agency and the necessary state filing fees paid (formation documents must include certain clauses and information, such as a very detailed business purpose statement, in order for the entity to qualify for tax-exempt status)
must apply for federal and state tax-exempt status (Form 1023 must be filed with the IRS, for state requirements, it is best to contact the department responsible for taxation in the state of formation)
provide limited liability protection (the personal assets of the directors, officers and members typically cannot be used to satisfy the debts and liabilities of the nonprofit)
certain nonprofits are eligible to receive public and private grants, making the obtainment of operating capital easier
ongoing state filing requirements and fees
Professional Corporations (PC’s) & Professional Limited Liability Companies (PLLC’s)
corporations and LLCs formed for the purpose of providing professional services
professional services is defined by state law and can differ from state to state (typically, professions that require a license, such as doctors, chiropractors, attorneys, accountants, architects, and engineers, are required to form PCs or PLLCs)
files formation papers with the appropriate state agency and pays the necessary state filing fees
require approval of the formation of the PC or PLLC by the state licensing body responsible for that profession
must contain the signature of a licensed professional in that field, who is often one of the directors of the PC or members or managers of the PLLC
More sources to help you
incorporate your business!
IRS
BizFilings
SmallBizIncorporator
