Registering your business as an LLC or Corporation comes with some significant benefits, including:
- Limited Liability — Avoid personal liability for debts or lawsuits incurred by your company. This benefit is very important as it protects your personal assets from business liabilities.
- Tax Benefits — Enjoy better taxation options. Check with an accountant about the best taxation options for your business.
- Equity / Stock — Use the stock or equity in your company to leverage employees, business partners, and investors.
COMMON ENTITY TYPES
Consult with your attorney and accountant to determine the best entity for your business. Some common entity types include:
LIMITED LIABILITY COMPANY (LLC)
A popular choice for many businesses as they offer the most flexibility and least amount of formalities. LLCs can have unlimited owners and different classes of ownership, so they can be suitable for simple or complex business structures. Owners can choose how they want the LLC to be taxed (i.e. as a sole proprietor, partnership, or S-Corp). LLCs also have the least amount of formalities required to upkeep and maintain the business. However, depending on your goals, an S-Corp or C-Corp may be a better option in some instances.
Generally good for small companies with just a few owners that do not need a complex business structure. They have “pass-through” taxation, meaning there isn’t a Federal tax on the company’s profits. Business owners only get taxed once when they pay themselves from the company. S-Corps only have one class of stock, so they are not ideal for complex business structures. CPAs sometimes recommend businesses be formed as an S-Corp instead of an LLC for tax purposes.
Generally good for companies seeking venture capital or looking to go public. Can have unlimited shareholders and different classes of stock (i.e. common stock and preferred stock). C-Corps are subject to double-taxation, meaning the company gets taxed on profits and the owners also get taxed when they get paid. Venture capital investors often prefer investing in a C-Corp over an LLC.
SOLE PROPRIETOR / GENERAL PARTNERSHIP
This when you do business as an individual (sole proprietor) or with a group of individuals (general partnership) without forming an LLC, Corporation, or other legal entity. You will not enjoy the benefits listed above. There is no limited liability protection. If anything goes wrong, your personal assets are at risk. This May be ok for low income, low risk, ventures if you are willing to tolerate the risk involved. Can get insurance to limit risk exposure. Still need necessary licenses and permits.
This guide is for informational purposes only and is not legal advice. Please contact us for professional assistance.