Choose a Legal Structure For Your Business (Part 2)
In the first part of this review, we looked at sole proprietorships and partnerships. These operations are easy to establish, but place virtually all of the risk of debts and business on an individual's shoulders. Corporations are more complicated to establish, but have the benefits of limiting the liability of the owners.
According to the US Small Business Administration, a corporation is its own legal "person," separate from its owners. This means, among other things, that creditors of the corporation may look only to the corporation and the business assets for payment. The individual shareholders are not personally liable for the losses of the business if the corporation is properly established and properly operated. The shareholders' only risk is their investment in the corporation.
C Corporation – C corporations have the advantage of being separate from the owners, meaning that the owners have limited liability. C corporations can also raise capital through the sale of stocks and bonds and can have ownership easily transferred. The main disadvantage is that they are double taxed, once in the corporation’s checking account and once after the employees get paid.
S Corporation – S corporations have the asset protection of a standard corporation with the taxation advantage of a flow-through entity (taxed like personal income instead of as a separate entity). However, there are strict regulations on the number and type of shareholders in the business, the amount stock that is issued, and the corporation's sources of revenue.
LLC (Limited Liability Company) – This is the newest and most popular structure. You get the tax benefits of a sole proprietorship and the limited liability benefits of a corporation without the bureaucracy.
Coming up: What's best for you, based on a variety of business scenarios.
Comments
Your mileage may vary with an LLC. It seems to vary state by state. Here in California, the LLC has some small advantage in paperwork over an S-corp. However, its much easier to sell, or grow a corporation (S or C).
Also what benefits that the owner's can receive tax free from the corporation depend on how its organized (LLC, S, or C)