When forming a business, it is important to know which type will suit the needs of your business best to ensure its success. The most common types of business structures and corporations are sole proprietorships, partnerships, limited liability companies, C corporations, and S corporations. Each has its own set of regulations concerning taxes, residency requirements and limits on growth.
A sole proprietorship is the simplest business entity in that there is no requirement to file with the state to form one. The owner is personally liable for any lawsuits filed against a sole proprietorship and profits and losses from the business are reported on the owner’s personal income taxes.
Partnerships are similarly easy to form as most states do not require filing. Liability for lawsuits rests with the partners and again business profits and losses are passed through to the partners and reported on their personal income tax returns.
The limited liability corporation is the most flexible business entity in contrast to S and C corporations. There is no residency requirement to form an LLC so owners do not need to be U.S. citizens or permanent residents. It offers legal protection to the owners from business debts and profits and losses are reported on personal income tax returns thereby avoiding double taxation. However, you may be subject to self-employment tax when you report earnings. If you are converting an existing business to an LLC, any appreciated assets may be taxable. Keep in mind that the growth of an LLC is limited as stock cannot be issued to attract investors.
This is the most common type of corporation in the U.S. and allows for the sale of stock in the company with no limit to the number of shareholders or restrictions as to who can be a shareholder. It can be expensive to form a C corp because of the many fees associated with filing the Articles of Incorporation and subsequent fees to be paid to the state. The Directors, officers, shareholders, and employees are protected by limited liability in the event of a lawsuit against the company. When it comes to taxes, revenue is first taxed at the business level and then again as shareholder dividends. Shareholders may not deduct corporate losses on personal tax returns.
S corps are similar to C corps in terms of limited liability protection, filing Articles of Incorporation, and offering stock to investors, but their differences lie in taxation and corporate ownership. An S corp is limited to no more than 100 shareholders who must be legal residents or citizens of the U.S. There is no double taxation as in a C corp, as the owners report profit and loss on their individual tax returns. Taxes are filed once a year unlike a C corp, which must file quarterly taxes. It is important to note that mistakes in filing requirements can result in termination of S corp status.
This overview of different business entities is extremely brief and anyone wishing to form a corporation should seek experienced legal counsel in order to thoroughly review the options in depth before deciding a course of action.
The business lawyers at MacMain, Connell & Leinhauser assist in all aspects of business formation, corporate compliance, governance, and employment law matters. Call 484-318-7106 to speak with an experienced business lawyer or contact us online.