Inc Business Structure: Everything You Need to Know
Inc business structure may be the best option for your business but it's wise to take a closer look into what incorporation involves before you make a decision.3 min read
2. Limited Liability Company (LLC)
3. C Corporation
4. S Corporation
5. Tips for Adopting Inc Business Structure
Inc business structure might be the best option for your business but it is wise to take a closer look into what incorporation involves before you make a decision. It's understandable if you feel confused about what type of business structure is right for you. Even the smartest business owners may feel confused and wonder where to start or what will be involved.
What is Inc Business?
Inc business, also known as business incorporation, is a broad term given to a number of legal business structure options. The most common Inc business structure options include:
- A Limited Liability Company (LLC)
- Corporation (C Corp or S Corp)
When a business is incorporated, it changes from a sole proprietorship to a company that is now legally recognized by its state of incorporation. This means that it is formally separate from the individuals that founded the company. An incorporated business is often viewed as a responsible company with a strong corporate identity.
The most popular options for a new business to incorporate as are either Limited Liability Company (LLC) or Corporation. If you form a Corporation, you can choose to be a C Corporation or S Corporation. You will find that each of the incorporation options has their own pros and cons.
Limited Liability Company (LLC)
- A relatively new structure, but recommended for most small companies because of the flexibility in management.
- Limited Liability protects the owners from being held personally responsible for company actions.
- Some states will require two or more owners also known as "members".
- Only a few states will limit the number of owners.
- Members own a percentage of the company and income can be distributed unequally.
- Transferring membership can sometimes be difficult.
- LLC's cannot go public.
- Taxation varies depending on the state.
- Company loss and earnings are recorded on the members' personal income tax return.
- Profits are subject to social security and Medicare taxes as well as income tax.
- LLC's are not subject to double taxation.
- It is usually easy to dissolve the company.
- This is the basic type of corporation in America which has been in use for a long time.
- It has a more rigid management structure and can involve more paperwork.
- Corporations have a board of directors that oversee the business.
- Owners receive a share of stock and become "shareholders".
- C Corporations are subject to high taxation.
- Income tax is paid on corporate profits plus shareholders pay tax on what they personally receive, this is known as "double taxation".
- Shares of stock are issued equally to owners.
- Shares can be traded freely between owners.
- Owners are protected from business debts by personal liability.
- C Corporations can pay employment taxes of only active shareholders.
- A more modern corporation structure which is popular because it is not subject to double taxation.
- As a Corporation, it also has a board of directors and shareholders.
- Profits go through the shareholder's personal tax return.
- Losses can be recorded on the personal tax return as deductions.
- S Corporations cannot offer stock plan options as an incentive.
- S Corporations are restricted to a maximum number of shareholders and shareholders cannot be non-residents.
Tips for Adopting Inc Business Structure
- Compare the options with a lawyer and accountant.
- Discuss how you want your company to be managed and how you want to pay taxes.
- Remember to consider the company's future, not just the current tax burden.
- Consider the paperwork and record keeping required for each structure.
- Consider the costs involved in adopting the structure.
- Consider whether you may want to sell the company at some point.
- The business structure you choose for your company does not need to be set forever.
- However, be aware of the restrictions or limitations for switching between the different Inc business structures.
- Be careful not to cause concern for the IRS.
- Be aware that liability protection may not be absolute.
You will most likely need to seek professional legal advice when deciding which Inc business structure works best for you. When you are making such a big decision for your business, it is wise to think things through thoroughly.
If you need help with Inc business structure, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.