For the vast majority of small business owners, incorporation is somewhere on the horizon. Incorporation is a legal process of forming a corporation and taking your business status to a whole new level. Incorporation will limit your personal liability in your business dealings. There are also many tax advantages to incorporation.
If the time is right for you to incorporate, there are three basic forms of incorporation that you can use – a limited liability corporation (LLC), an S-corporation and a C-corporation. Each method of incorporation has its own advantages and disadvantages. Learning more about each will help guide you in the right direction so can find the incorporation help you need from a legal professional.
Limited Liability Corporation
LLC is a newer form of business organization that is becoming more popular. As the name implies, owners of an LLC have limited liability protection.
Advantages – You get all of the benefits of having a corporation, like the tax savings and liability protection, but you avoid some of the paperwork that is associated with a regular corporation. LLC owners experience “pass-through” taxation which means that the profits from the LLC are taxed at the member level and not at the LLC level. This helps avoid the “double taxation” that corporations are subject to. There’s also flexibility with taxes – LLC owners can choose to be taxed as an S-corp, a partnership or a sole proprietor.
Disadvantages – Your earnings are subject to self-employment tax. In addition, an LLC is treated like a partnership so you can’t take advantage of incentive stock options. When you convert to an LLC, you may be taxed for appreciated assets.
An S-Corporation functions similarly to a partnership, with a similar tax structure.
Advantages – The biggest pro for S-Corps is that there is no corporate tax. The profits and losses of the business pass through to the owner’s personal income tax. Just like with an LLC, S-Corp owners avoid “double taxation.” You can write off your start-up losses and you have liability protection from your company’s dealings.
Disadvantages – S-Corps are less attractive to outside investors, which can limit your venture capital opportunities. Although you aren’t taxed as a regular corporation, you’ll still have to file a tax return for your business every year. You’ll also need to have regular meetings and maintain company minutes in order to comply with rules governing corporations.
A C-Corporation is also called a “regular corporation.” It has a more complex structure than the other forms of corporations and needs a board of directors and shareholders.
Advantages – Like the other forms of corporation, a C-Corp protects owners from liability issues. There are numerous tax benefits, including a lower tax rate depending on your business income. There are numerous tax deductions that C-Corps
Disadvantages – Owners have to file two forms with the IRS – one for personal taxes (which include income for the business) and another form the business. There are numerous laws that apply to corporations that must be adhered to by your company. Starting a C-Corp is more costly than other types of corporations.