Now that you’ve selected a business name, it’s time to decide which business formation would best suit your needs. Fortunately, even if you haven’t had a business before-the decision isn’t as difficult as you might think. We’ve put together some basic information to help in your decision making process.
There are four different ways to form your business; each has different responsibilities, some have certain advantages.
Sole Proprietorship
Let’s start with the most basic business formation, a sole proprietorship. This is a business owned by a single individual or jointly owned by a married couple.
Generally speaking, people choose this formation when first starting a business due to the ease of setting it up. Additionally, the owner can operate the business as he/she chooses without the input of partners, directors and shareholders.
As a sole proprietor you assume all responsibility for all obligations, debts and other liabilities that the business may incur.
As your business grows, you will most likely change the structure of your business to take advantage of benefits and protection offered by being incorporated or an LLC.
Limited Liability Company (LLC)
The next business formation option is a Limited Liability Company or LLC. Although not a corporation, it does have some corporate-like liability protection for the owners.
You are typically not required to hold formal meetings or keep detailed minutes. As a member of the company, you can be involved in the management of the business, and have the flexibility and tax advantages of partnerships, but you are protected from the liabilities.
Members can choose to be taxed as either a traditional corporation or as a “pass-thru” entity. This is a very popular business formation for these reasons.
C Corporation
A corporation is a legally created entity with rights, duties, powers and responsibilities. Each state has its own section of law governing aspects of corporations.
A corporation can only act through individuals and when individuals perform on behalf of a corporation, the actions are considered part of the corporation, not the individual.
The ownership of any property, the incurrence of debt and performance of services and sales of goods are the responsibility of the corporation.
Some of the benefits in establishing a corporation is that they offer personal liability protection, tax savings, and increased opportunities for raising capital. Corporations are also required to perform certain formalities such as holding annual meetings and keeping detailed corporate records (minutes).
Shareholders contribute capital to the company and are the owners of the corporation. An additional advantage of corporations is the ability to bring other individuals into ownership of the business to raise additional funds.
These are just a few of the many reasons to consider incorporating your business.
S Corporation
There is an alternative to filing a C Corporation, this is called a S Corporation. While there are some similarities to both, like legal protection, there are certain distinct differences. The main difference is with regard to tax purpose, the income or loss is passed on to the shareholders in proportion to their ownership. As an “S Corp”, you must apply to the IRS for “S Status” (request form 2553) within 75 days after the formation of a corporation. Additionally, with a S Corp, membership is restricted to 100 shareholders.
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