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Incorporate A Business: Choosing A Legal Entity
Posted By Small Business Editor On October 16, 2012 @ 12:30 pm In Startup | 10 Comments
If you’re ready to incorporate a business, one of the simplest ways to create a legal entity for your company is to set up an LLC. The LLC stands for “limited liability company,” and it gives you the ability to create a separate legal entity for your business which is separate from your identity as the owner. Like other corporate structures, the LLC gives you a “corporate shield” when you incorporate a business, to separate and protect your personal assets from those of your business.
The LLC is a popular choice with small business owners and solo entrepreneurs when it comes time to incorporate a business, because it does not have as many formalities and “red tape” requirements as a C Corporation or S Corporation. The filing requirements are easier, and you don’t have to set up a board of directors, host an annual shareholders’ meeting, or deal with as many other regulatory formalities.
An LLC also offers “pass through taxation,” meaning that the company itself does not pay income taxes. Instead, the company’s earnings are passed through to the company owners. This makes the LLC a simple and effective choice for many solo entrepreneurs, who get the personal asset protection of a corporation without having to deal with the additional paperwork involved with setting up an S Corporation. Here’s a comparison of the S Corp versus the LLC .
Another unique feature of an LLC is that the owners can choose different “tax treatment”  by filing additional forms with their tax returns. For example, you can choose to have your LLC taxed like a C-Corporation, or you can choose pass-through taxation like a sole proprietor, or you can choose to treat your LLC like an S-Corporation for tax purposes. If you’re ready to incorporate a business and form an LLC to protect your personal assets and boost your business credibility, talk to CorpNet today for a free business consultation .
If you’ve decided to incorporate a business, perhaps you’ve wondered:
“What is the difference between an LLC and an S Corporation and what are the tax benefits of choosing one business structure over another?”
One option for business owners who want to minimize the amount of taxes they owe while still enjoying the most flexibility in how to set up and run their company is to incorporate as an S Corporation.
The S Corporation is a corporate structure governed under subchapter S of Chapter 1 of the IRS Code. As such, S Corporations have unique tax rules which can offer special benefits for the owners. The S Corporation is one of the most popular business structures in America, with over 3 million small businesses incorporated as (or filing taxes as) S Corporations.
Perhaps the biggest tax advantage of an S Corporation is that they can help the business owner minimize the amount of self-employment tax that is owed. When you’re a sole proprietor, often the biggest line on your tax bill is the amount of self-employment taxes collected for Social Security, Medicare, unemployment and other programs – this can add up to approximately 15% of your eligible earnings.
With an S Corporation, the company is governed by pass-through taxation (like an LLC), and so the company itself does not owe any taxes. Instead, the company’s earnings are listed on the owners’ individual tax returns. But with an S Corporation, the owners have some flexibility in how they report their earnings, and in doing so, they can often minimize their self-employment income tax liability.
For example, an S Corporation that earns $100,000 in profit could pay the owner a $50,000 salary (which is subject to self-employment taxes) and also pay the owner a $50,000 distribution (which is not subject to self-employment taxes). Assuming approximately a 15% self-employment tax rate, the owner of the S Corporation would have saved $7,500 on self-employment taxes.
One drawback of the S Corporation is that you are limited in the number of shareholders that can own a piece of the company. There is a maximum of 100 shareholders that can take part in an S Corporation, and only one class of stock can be issued. This means that S Corporations cannot be used for an initial public offering, and it also makes it hard to use an S Corporation if you want to raise venture capital. Another restriction of S Corporations is that only U.S. Citizens can be shareholders.
If you incorporate a business as an S Corporation, it is not to be taken lightly, as there are numerous business filings and regulatory requirements that need to be done throughout the year. So you’ll have to decide if the S Corp is right for your small business . If you want to learn more about how you can incorporate a business as an S Corporation to protect your personal assets, talk to CorpNet today for a free business consultation .
All About The C Corporation
The third main choice of business structure that entrepreneurs can choose when it’s time to incorporate a business is the C Corporation. Although the C Corporation has more complicated tax and regulatory filing requirements, it is an ideal choice for certain types of companies with certain business goals.
A C Corporation is a standard corporation owned by shareholders who elect a board of directors to oversee the management of the business. Shareholders generally have limited liability, even if they are involved in the day-to-day management. The shares of a corporation are freely transferable unless limited by agreement of the shareholders.
The corporation exists indefinitely, unless and until it is dissolved by the shareholders. It is a separately taxable entity, meaning that the company must file its own tax return and pay corporate taxes on its profits. There is no limit on the number of shareholders a C corporation may have.
C Corporations can create multiple classes of stock, such as “preferred shares” with advantageous terms for certain shareholders. This makes C Corporations a popular choice for businesses that want to raise venture capital or make an initial public offering (IPO).
One potential drawback of C Corporations is that they are subject to “double taxation” – meaning that the company itself has to pay corporate income taxes on profits, and then those profits are taxed again as dividends when paid out to shareholders. Working with a professional tax accountant can help you understand your options to effectively minimize your tax liability. If you’re ready to incorporate a business as a C Corporation to protect your personal assets and boost your business credibility, talk to CorpNet today for a free business consultation .
Choosing a business structure can be complex, but you don’t have to worry about making “the wrong choice,” because you can always change your choice of business structure by filing the appropriate forms. If your business is growing or your business needs have changed, you can switch from an LLC to an S-Corporation to a C-Corporation and back again .
Whether you need a basic LLC to protect your personal assets, or whether you need a more complex C Corporation structure that could help your company raise venture capital or “go public” someday, you can incorporate a business according to your needs and can change as your business evolves.
One of the best things about entrepreneurship is the way it enables us to adapt and evolve as our interests and the needs of our markets change – and incorporating a business is the same way.
Even if you’re not sure of which business structure to choose, you don’t have to fear making the wrong decision. We’ve made it simple for you – just get started by Taking our quiz ! Incorporate a business and protect your personal assets, and you can move forward from there.
Researching  Photo via Shutterstock
Article printed from Small Business Trends: http://smallbiztrends.com
URL to article: http://smallbiztrends.com/2012/10/incorporate-a-business.html
URLs in this post:
 the S Corp versus the LLC: http://smallbiztrends.com/2011/03/s-corp-versus-llc.html
 owners can choose different “tax treatment”: http://smallbiztrends.com/2011/11/will-llc-lower-business-taxes.html
 free business consultation: http://www.corpnet.com/start-a-business/free-business-consultation/
 decide if the S Corp is right for your small business: http://smallbiztrends.com/2011/02/is-s-corp-right-for-your-small-business.html
 switch from an LLC to an S-Corporation to a C-Corporation and back again: http://smallbiztrends.com/2011/10/time-to-change-business-structure.html
 Taking our quiz: http://smallbiztrends.com/business-structure-quiz
 Researching: http://www.shutterstock.com/pic-91934246/stock-photo-woman-going-over-a-work-presentation-with-her-boyfriend-during-breakfast.html