Types of Companies: Everything You Need to Know
Types of companies are determined by their owners. An LLC can make a division between your personal life and business life. 9 min read
Types of Companies
Types of companies are determined by their owners. An LLC can make a division between your personal life and business life. While an LLC company undergoes taxation similar it is similar to a sole proprietorship (if there’s just one owner) or if it a partnership it has multiple owners. LLCs have no limits to the amount of owners they can have. LLCs don’t require a yearly meeting or the need to record minutes. LLCs are regulated by an operating agreement. LLCs with a single member don’t exist in terms of federal taxes, while an LLC that has greater than one member is considered a partnership. If that LLC should file a form with the Internal Revenue Service, then it can transform into either and S or C corp. Not all states follow federal regulations on this matter.
What is a C Corporation?
C corporations have independent tax and legal structures that are distinguished from its owners. C corporations can create a division between personal assets and professional debt. C corporations have zero limits to their range of shareholders. C corporations get taxed on their corporate profit, and the shareholder’s dividends. A C corporation has to host a yearly meeting and also document those meeting minutes.
What is an S Corporation?
S corporations enjoy independent tax and legal status separate from their owners. S corporation can also help owners divide personal assets from professional debts that are owed. S corp owners tell the IRS the share of profit/loss their company enjoyed or suffered, and say so on a personal IRS tax return. S corporation does limit its number of shareholders, and those shareholders have to be U.S. citizens or at least U.S. residents. S corporations have to host yearly meetings and also record those minutes.
Partners are personally liable if any lawsuits are created that the business is a defendant. Usually no state that’s going to file will require a partnership to be formed. Partnerships are easy to form and operate within, and the owners simply tell their profits shares and losses on their personalized returns for taxes.
Sole proprietors are liable for any suits filed against his or her company. There are no state-level filings required in order to create a sole proprietorship. Sole proprietorships simply report their profits and losses on their own IRS tax returns.
Filing a DBA on a Company
Filing for a DBA (which stands for “doing business as” or known as an “assumed name”) makes it so that a business can operate using a different name. This usually happens at the county-level, sometimes state-level. Pertaining to any sole proprietors and partnerships, the company name is the same as the owners’ names unless a DBA is filed. For instance, Ned Turner owns a gardening business and is the sole proprietors.
If Ned Turned wants to do business as Ned’s Landscaping, then he has to file a DBA with the county. If he doesn’t, his business is just called Ned Turner. Corporations and LLC companies can apply for a DBA if they want to do business by different a name than what’s on file with state. For instance, a company called as Jones and Jones, Inc. could do business under Jones' Company for Computing if they file a DBA to use a more specific business name.
Advantages & Limitations of Filing a DBA
Sole proprietors and partners benefit from a DBA because it doesn’t ask the same compliance standards of making a new corporation of filing for an LLC status. An LLC allows the business to operate with a new name, but it also doesn’t give any liability protection or any tax benefits. When you file for a DBA it doesn’t change your official name, it just allows you to go by a new name for your trade, perhaps instead of your official LLC name.
Forming a Corporation or LLC
If you want to incorporate your company then you’ll need the following: formation documents, articles of incorporation, and articles of organization pertaining to LLCs. These must be filed with the state. Incorporation assists in protecting any personal assets, and sole proprietors and general partnerships making use of a DBA can be protected against liability that is without limit. If you incorporate, it protects your assets on a personal level, but a DBA doesn’t protect against this.
Limited Liability Company (LLC)
The LLC also helps you with liability protections, and in relations to taxation isn’t not dissimilar from a D corporation. Under both designations, you declare any expense incurred and also your income level on your own tax return. If you own an LLC, you’re considered disregarded in terms of entity. What’s that? It means you divulge your LLC income and its expenses on the IRS’s Schedule C Form 1040. This is also utilized by sole proprietorships.
LLCs Advantages & Limitations
C corporations and S corps, and an LLC provide a business owner with protections against personal liability. An S corporation and an LLC are typically declared for small businesses. Either designation lets you grow and add owners to your roster, while they each cost around the same to get started, assuming their filing plus continuing fees are the same by state. A big distinction is how those owners are taxed for employment. S corps’ shareholders are actually employees, so Social Security and Medicare (called F.I.C.A) taxes are applied to pay received, but not to any distribution given.
Incorporating your business or forming an LLC has advantages for owners conducting operations as a sole proprietor, or in a partnership. But those advantages don’t include liability protection that is limited. Certain tax boosts like deductions aren’t available to sole proprietorships, however. There are chances to earn credibility with new customers, vendors, employees, and investment partners though, and sometimes investment capital is more easily raised.
To Make Your Decision
If you want to file a DBA or decide to form a corporation (maybe an LLC) then it hinges on your specific business, scope, and future plans. Corporations currently existing, and LLCS deciding whether to file for a DBA should think about the projections of the new name and what focus is allowed under that business’s purpose? This is discussed in your company’s Articles of Incorporation or its Articles of Organization. Consider whether there benefits to making a subsidiary, or making a whole new business that will work in conjunction in your existing business?
United States corps must file a federal-level IRS return yearly. Plenty of U.S. states make it a requirement to deliver yearly tax returns, too. Businesses are considered C corporations when they form. If a company’s shareholders should qualify and elect to do so, then the company can be an “S” corp, which has specific benefits and related fees.
Liability Protection Definition
Liability refers to any overdue bills or if the company is declared a loser in a lawsuit, then the shareholders, members, or any partners or owners must use their personal assets (even a house) to pay the balance.
Limited Liability for LLCs
Shareholders of any corporation or LLC shareholders are only responsible for capital they’ve invested in that company. If a shareholder hasn’t paid their fair share of invested capital should the company goes under, they may be on the hook for the remaining. An LLC’s members enjoy protection up to their investment, so long as there aren’t any managers of that LLC that have a court-obligated responsibility for any business done by LLC. Even then, some of the member may not have additional liability.
Liability Without Limit
Sole proprietorships don’t exist away from the owner. It allows for the right to make use of a name you weren’t given at birth, which means it’s all about you and your sole proprietorship. If you’re responsible for any damages, then your personal finances are in the balance. A partnership is even worse, each partner is fully liable for all partnership-related debts and obligations of every other partner, this means that if your partner did something wrong you can be required to satisfy the obligation, regardless of how much (or little) you invested in the partnership.
Corporation law is centuries old. It’s founded on the idea that a corporation’s assets are separate from the owners of the company. The owners of the company, called shareholders, vote on directors that carry out their interests.
Limited Liability Company Law
LLC Law is predicated upon partnership laws that allow limitations of liability which relate to corps. In other words, the owners and the company being separate is a less complete proposition. In some U.S. states, is a Member of an LLC departs the company, passes away, or files for bankruptcy, that business could even dissolve unless there are remaining votes.
Corporation Ownership of Real Estate
To own real estate via a corp is uncommon, due to the tax repercussions. Limited liability is desirable, and S corporation status doesn’t make real estate ownership via a corp a good option.
LCC Ownership of Real Estate
The pass-through taxation advantage, paired with liability protections, have LLCs come out the ideal way to own real estate through a business entity.
A corporation is owned by a group of shareholders via stock shares. As a company is created, the corporation informs the state the number of stock shares it can issue. That’s the definitive ceiling that can be sold to other people. The corporation does not have to issue all those shares, and if there is only one shareholder that shareholder owns 100% of the company whether one share was issued or 1,000. There can be more than one “class” of shares, so that the owners can better divide up how profits will be shared.
Limited Liability Company Ownership
LLCs are made up of Members. Because LLCs are steeped in partnership, a company’s owners are outlined in a company’s operating agreement which governs the affairs of a company. Most LLCs prefer to dole out Membership certificates to every member, though it’s not necessary. Membership certificates designate how much “Membership interest” each member has but this is not as important as the operating agreement. Members can be divided up into different classes, each class having different rights and privileges. Members may also decide not to have any Managers, and thereby run the company by themselves.
If an LLC is owned by its members, they are predicated upon partnership and its governances in the law, and so the owners that are outlined in the operating agreement give the company order and direction. Some LLCs prefer to dole out membership certificates their members, though this is unnecessary. Membership certificates designate how much “Membership interest” each member has but this is not as important as the operating agreement. Members can be divided up into different classes, each class having different rights and privileges. Members may also decide not to have any Managers, and thereby run the company by themselves.
Transferring Corporation Ownership
To pass a share of a company, you have to cancel an existing share. If the company seeks to redeem its shares, a certificate is removed from circulation. If a share is given for sale to someone else, the company must cancel a commensurate share, then issue a novel certificate to the novel owner.
Transferring LLC Ownership
It’s hard to transfer an LLC’s ownership, and its operating agreement can even prohibit this.
When to Avoid a Corporation
Do not use a corporation for the holding of real estate or if you dislike formalities.
When to Avoid an LLC
Do not utilize LLCs if you want to go public down the line. Do not utilize LLCs if you want to complete trade or do business in the US if you aren’t a resident, unless you want to weather the complexities of international taxes.
Private Limited Company
Companies that aren’t public are considered private under the law and a private company is the base status. A private company can be anything from a basic, miniscule family operation to a major subsidiary in a massive grouping that has serious trade rights Occasionally, a company just trades vehicles for a handful of individuals that want to enjoys the advantages of limited liability, or the bonus of trading as a major corporation.
Private companies are flexible because they’re adaptable, depending on the requirements they set forth, but they can’t be traded to the public under the law’s provisions. Private companies that want to issue stocks to the public have to transform to what’s called a PLC or a “public limited company.” In private companies, there are less shareholders than in a publically traded company, and there are more onerous restrictions on transferring shares in a private company.
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