Selecting the Right Formation for Your Business

When forming any business, the questions and concerns are seemingly endless. Do I have personal assets that could be at risk? Could I be sued for a business issue? To address these issues and concerns, it’s important to look at the differences between the most popular business structures available and choose which is best for you and your company’s needs.

A C-Corporation is the most common and most traditional structure of business. The number one advantage of a C-Corp is the ability to have an unlimited number of shareholders in your company. Not only is this useful in companies with a large number of investors, but possessing C-Corp status makes for happy shareholders who enjoy complete personal liability protection for any debts or claims arising from the company and its operation of the business. Stock can also be sold or transferred very simply, with few very limitations and restrictions on stock transfers. If your company plans to offer stock publicly, C-Corp status is the only option for you, as C-Corps are the only entities able to offer ownership of stock through the public. The cost associated with filing a C-Corp form tends to be slightly less than those of an S-Corp or LLC in most states, and the familiarity of a C-Corp over the newer LLC structure gives preference to the C-Corp structure for most business owners. As a drawback, however, C-Corp businesses are subject to double taxation, in which the company’s profits are taxed at the corporate level and then taxed once more at the individual level when distributions are made to the shareholders.

The S-Corporation structure is becoming more and more popular for many smaller businesses that are not concerned with unlimited numbers of shareholders and public stock options. An S-Corp must file Articles of Incorporation and is initially formed as a C-Corp, and then must file an additional form with the IRS to become an S-Corp. The main benefit of an S-Corp is that it avoids the double taxation issue and allows shareholders to receive their distributions free of taxation at the corporate level, only being taxed at the individual level. Additionally, S-Corps and their owners are separate entities and the owners and shareholders enjoy personal liability protection for their personal assets. Not all C-Corps can move on to receive S-Corp status, so check to make sure that your company is eligible to form an S-Corp. To be eligible, a company must not have more than 75 shareholders, all shareholders must be individuals, no shareholder may be a non-resident alien, only one class of stock is permitted, the company may not be a bank or insurance company and no more than 25% of the company’s gross income may be derived from passive income.

As the newest structure of business, many home-based businesses and even larger entities are forming as Limited Liability Companies. Its main appeal is the benefit of personal liability protection such as that of a corporation, but with a much more favorable tax advantage. An LLC operates in most ways as a corporation, but its distributions are not subject to taxation at the corporate level. The distributions are taxed only at the individual level, and can be taxed on the individual’s personal income tax return. LLCs avoid the double taxation that is evident in C-Corp structures but enjoy the same personal liability protection as C-Corps and S-Corps. LLCs and their personal owners are separate entities and the personal assets are not accessible by business creditors. LLCs can also be member-managed, and can be managed directly by the shareholders instead of a Board of Directors.

When forming your business, research all the options and choose the business structure that ultimately offers the most beneficial features for your company and its needs. A glance at your personal assets will also help determine what structure is best for your business, so a combination of both the personal and business aspects of your life will help you decide the best form of business that will lead you to success.

Leave a Reply

Your email address will not be published. Required fields are marked *


five + = 11