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At UpCounsel, we want to help you save time and money forming a business the most efficient way possible, based on your needs and goals of forming a company.
With the many challenges that come with starting a business, dealing with expensive lawyers and extensive paperwork should not be one of them. There are several types of business formations to choose from: C-Corporation, S-Corporation, or an LLC. All three types have unique requirements and separate rules and regulations in order for them to be formed and maintained.
By having an experienced business attorney on your side to make sure everything runs smoothly, you can save a lot of time and investment, while concentrating on what matters most - growing your business.
To get started with forming your business, post a job for free and get several proposals from expert business formation attorneys who can help you today.
A C-Corporation is the most common type of corporation. It’s a business entity in which its profits are taxed separately from its owners. C-Corporation owners are not personally liable for any debts incurred by the corporation and cannot be sued for any of the corporation’s wrongdoings. C-Corps allow for an unlimited amount of shareholders and can be owned by other corporations such as LLC’s or even trusts. C-Corps have more flexibility as well with shareholder rights and ownership, but typically face tougher tax implications because of this.
An S-Corporation, commonly referred to as an "S-Corp", is simply a corporation that has filed a document with the IRS to become a special type of corporation. By electing to be treated as an S-Corp, the corporation can avoid double taxation. Corporate losses, income, credit and deductions can be passed through to shareholders, rather than once to the corporation and once to the shareholders. An S-Corp only allows a specific amount of stock to be distributed and all holders must be United States residents. Shareholders rights are much simpler here and double-taxation that occurs with a C-Corporation’s income is eliminated.
A limited liability company or “LLC” is a hybrid between a partnership and corporation. Forming an LLC will create a legal entity distinct from its owner “members” granting limited liability like a corporation, but will have fewer formalities like a partnership in terms of taxes and centralized management. LLCs are not taxed as a separate business entity and all profits and losses are "passed through" the business to each member of the LLC. The LLC members report any profits and losses on their personal federal tax returns, just like the owners of a partnership would.
Forming a basic LLC can be done for as little as $500 (including all filing fees). C-Corporations, which are a bit more complex, can be formed for as little at $1000 (including all filing fees) depending on the complexity of the shareholder and investor relationships.
Why should I consider incorporating my company?
There are a number of advantages to forming a company to house your business. However, the main reason you should incorporate is for personal asset protection. When you operate as a sole-proprietorship, you are entirely and personally responsible for the actions of the company. Incorporating allows the business owner to separate and protect their personal assets in case of a lawsuit or claims against a business entity.
Another reason to incorporate is for perpetual existence. A sole proprietor or partnership usually ends on the death of the owner or owners. Forming a corporation ensures that your company's legacy can be preserved, as well as continue to provide employment and services for clients should any changes in ownership take place.
There are also several tax advantages and benefits of incorporating a small business. While profit and loss typically "pass-through" an LLC and get reported on the personal income tax returns of owners, an LLC can also elect to be taxed as a corporation. Likewise, a corporation can avoid double taxation of corporate profits and dividends by filing a IRS Subchapter S tax election form.
Do I Need to Form an LLC or a Corporation?
Many small businesses question whether they should start an LLC or a Corporation. The relative simplicity and flexibility of an LLC is typically better for businesses who want to avoid heavier fees early on with few tax obligations.
- Both an LLC and a corporation typically do not take any personal responsibility for the business’s debts and liabilities. Both types of businesses do not take liability because they are separate legal entities created by a state filing.
- LLCs are what people like to call “pass-through” tax entities, which means that all the profits and losses pass through the business to the owners who report their share of the profits on their personal income tax returns. An LLC can be taxed like a corporation by stating so in its Operating Agreement. A corporation will not share these easier taxation laws, as a corporation is a separate taxable entity. You will need to file a corporate tax return, reporting the profits and losses of the business. These profits are taxed at a corporate level and any corporate income distributed to its shareholders will be taxed at the shareholders personal income tax rate.
- To raise capital, corporations have the ability to sell ownership shares in the company through stock offerings, while LLCs can only sell interest in their company. Businesses who are going to need venture-backed funding or need to pay employees in stock are going to need to form a corporation.
As you can see, there are some important differences between LLCs and Corporations and it’s crucial to distinguish the pros and cons of each before making a decision.
What’s the difference between a C Corp and an S Corp?
C Corps allow for an unlimited amount of shareholders and can be owned by other corporations such as LLC’s or even trusts. C Corps have more flexibility as well with shareholder rights and ownership, but typically face tougher tax implications because of this. This is due to a corporation’s ability to offer ownership shares in the business through stock offerings when a corporation goes public through an IPO (Initial Public Offering).
An S Corp is simply a corporation that has filed a document with the IRS to become a special type of corporation. The main difference deals with taxation issues, but additionally, an S corporation only allows a specific amount of stock to be distributed. Shareholders rights are much simpler here and double-taxation that occurs with a C corporation’s income is eliminated.
Are there disadvantages to incorporating?
Corporations are governed by local, state, and federal regulations to a greater degree than are other businesses. A corporation needs annual meeting votes, a minute book, financial records, separate income tax forms, and an annual report with a filing fee to the designated state authority you incorporated in. Regulatory and record keeping guidelines and requirements often make it necessary for corporations to make additional investments devoted to seeing that those legal requirements are met. In addition, there are fees associated with incorporating that business partnerships and sole proprietorships are not subject to.
Also be aware that while incorporation provides significant protection of owners' personal assets from repercussions of business downturns, it also means that you are not allowed to tap into the corporation's account for assistance in meeting personal debts.
Double taxation on a C-corporation's income occurs with income taxed to the corporation and again to the owners when distributed to them as dividends. To avoid it, the sub S election, available for most small businesses, allows the S-Corp owner to be treated like an individual. There are numerous factors to consider in making this election, and they may vary with changes in your priorities and number and tenure of employees. Deciding whether to be taxed as a C corporation or making a sub S election is an important decision. An UpCounsel attorney will ensure that you make the right decision for your particular situation.
Which Corporation is best for my needs?
Each business type has its advantages and disadvantages. An UpCounsel attorney will help you through the pros and cons and analyze which is best for your situation and help you file the correct federal and state paperwork.