Overview: Choosing the right Corporation for you
When you are on your way to start your own company the first thing you have to put in mind is what type of company do you want to put up. Before registering your business with the state you have to first choose the kind of business structure that you want for your corporation. The kind of business structure you choose affects many aspects of your business, from the day-to-day operations of the business, the taxes you have to pay, and how much of your assets are going to be at risk. In choosing the right kind of business structure, you have to put in mind different aspects that could provide your company with the perfect balance of legal protection and benefits.
You have to be careful in choosing the right business structure for your company. Although it is possible to convert your business structure after being in the business for some number of years, you might encounter some restrictions in doing so depending on your location. Some of the complications you might encounter along the way are tax consequences or unintended dissolution's, to name a few. Thus it would be wise to consult business counselors, attorneys, and accountants with regard to choosing the right business structure for the business that you intend to put up.
Here are the common types of business structures:
- Sole Proprietorship – is the easiest to form amongst the other types of business structures. This means you have complete control of your own business, all the assets and liabilities of your business are not separate from your personal assets and liabilities. The downside to this type of business structure is that you are personally liable for all debts and obligations of your business. It would be hard for you to raise money for your business because you cannot sell stocks and banks are hesitant to grant loans to sole proprietorship businesses. This type of business structure would be suitable for low-risk businesses, or proprietors who want to test their business concept first before going into a formal type of business.
- Partnership – Is the simplest structure for two or more people to start up their own business. There are two kinds of partnership: limited partnerships (LP) and limited liability partnerships (LLP). Limited partnership simply means that one partner has unlimited liability while other partners have limited liability. Partners with limited liability have limited control over the company. Profits for this type of partnership are passed through to personal tax returns. The partner with unlimited liability must also pay self-employment taxes. Limited liability partnerships (LLP) are quite similar in principle with limited partnerships (LP), although with limited liability partnerships, ALL owners of the business are given limited liability. This type of partnership provides protection for all partners from debts incurred during the partnership, because all partners are not responsible for the actions of other partners. Partnerships are a good choice for businesses owned by multiple owners or professional groups (doctors, lawyers, etc.), or groups who want to test their business concept before going into a formal business.
- Limited Liability Company (LLC) – a limited liability company allows you the advantages of both a corporation and a partnership. LLC’s can protect you from personal liabilities in most instances. Personal assets like vehicles, properties, and personal savings accounts won’t be at risk in case your LLC faces any lawsuit or goes into bankruptcy. Downside to LLC’s is the fact that they have limited life in many states. In some states they may require LLC’s to be dissolved or reformed once one a partner want to leave or join. This type of structure is best suited for medium or higher risk businesses that have owners who have a significant amount of assets and want to pay lower taxes that that of a corporation.
- Corporations – Corporations can be classified as a C-Corporation, S-Corporation, B-Corporation, Close Corporation, Non-profit Corporation, and Cooperative.
C-Corporation – These are legal entities that are separate from their owners. They can be taxed, make a profit, and can be held legally liable. Due to the high cost of forming a corporation and its extensive requirement for keeping records and reporting operational processes, it offers the highest protection for its owners against personal liabilities. Unlike the previous types of business structures, corporations pay income tax on their profits, and in some cases corporate profits are taxed twice – first, whenever the company makes a profit, and again when dividends are paid to shareholders as reflected on their personal tax returns. Corporations can continue business even if shareholders leaves the company or sells their shares of stock, they can continue doing business undisturbed. Corporations can also raise funds for the company by selling stocks.
S-Corporation – Unlike C-Corporations, S-Corporations are designed to avoid the problem of double taxation. S-corps allow losses and profits to be passed directly to the personal income of its owners without being subjected to corporate taxes, although not all states tax S-corps equally, and some states don’t even recognize the S-corps status of a business and tax it just like a regular C-corps. Unlike C-Corps, S-Corps cannot have more than 100 shareholders, and all shareholders must be US citizens. Like C-corps, S-corps can also operate uninterrupted even if shareholders leave the company or sell their shares of stock.
B-Corporation – A benefit or for-profit corporation, or what is also called as a B-Corporation may be different in purpose, accountability, and transparency as C-Corps, but both are taxed the same way. B-corps are bound by a mission while driven to make a profit. This type of company is accountable to its shareholders in making financial profits while creating something that will that would benefit the public.
Close Corporation – Are somewhat similar to B-corps, but having a less traditional corporate structure. Close corporations may be run by a small group of shareholders without the need to hire/elect a board of directors. Rules governing this type of corporation vary in each state, but shares of this type of corporations are not allowed for public trading.
Non-profit Corporations – Are organized to benefit the public. They are mostly businesses that do charity, religious, education, literary, and scientific work. Because of their non-profit status they are mostly tax exempt, meaning they don’t pay any state or federal income taxes from any profit that they make.
Cooperative – Is a business entity that operates to benefit those who use its services. Profits or earnings of this type of business are distributed to members who are also called as “user-owners”. This type of business structure is usually run by a set of elected board of directors and officers, and its members are the ones who have voting power and control of the direction of the cooperative. Members can take part in a cooperative by buying shares, although the amount of shares they have does not affect the weight of their vote.
