Choosing the best and most suitable legal structure for your business starts with looking into your company’s goals and considering local, state and federal laws. By discovering your goals, you can choose the best type of business incorporation that best fits your company’s culture. You can then register your business under the relevant type of business incorporation structure either by yourself or with the assistance of professionals here.
How do you choose a type of business entity? We have outlined some of the most important factors for you.
Tax Treatment
Double taxation is a major headache for many companies. As a C Corporation, your company’s yearly income is subject to a tax from your state and federal government. However, you should also pay taxes on the personal income you bring in from the company itself.
An S Corporation or an LLC can avoid this completely by being subject to pass-through taxation. Rather than impose taxes on both the corporation and the income of the business owner, this allows the tax to rest totally on income that the owners and investors receive from the business. The disadvantage, though, is that S-corp owners are subject to self-employment taxes for the income they take in salary. On the other hand, LLC owners who are taxed like a sole proprietor or partnership are subject to self-employment taxes for the full amount of the profit they take home.
Ability to Raise Capital
This is really important for any business. How you raise capital is the focus of significant regulation, which entirely depends on your chosen business entity. While C Corporations provide the largest amount of flexibility, raising capital as a partnership is subject to especially strict rules. An S Corporation offers some of the flexibility of a C Corporation. However, its number of shareholders is limited to no more than 100.
Separation of Ownership and Management
Personal liability is a huge worry for a lot of entrepreneurs, which is why many businesspeople acquire the help of a professional service to properly structure their businesses. Several establishments — corporations, LLCs, and limited partnerships — distinguish ownership from management and hence defend the business owner from lawsuits brought against the business.
Sole proprietorships and general partnerships leave the owner openly vulnerable to being held personally accountable for their management decisions.
Limited Liability Protection
Just as you do not wish to be held personally liable for a lawsuit held against your business, it is important that your personal assets continue being protected from potential business liabilities. This is usually the major reason for choosing to incorporate a business as a C Corporation, S Corporation, or LLC. But then again, sole proprietorships and general partnerships do not provide this kind of asset protection.
Transfer of Ownership
Transferring ownership of a business is generally quite simple and straightforward in a C Corporation or an S Corporation. This is because the ownership is based entirely off of the shares held — the owner needs only to sell their stocks to the new owner.
Other business establishments do not offer the same convenience of transfer. Partnerships must be ended and sole proprietorships require that the business be sold in entirety to transfer ownership.
Ease of Formation
Are you wondering why anyone would want to choose a sole proprietorship or partnership over a business establishment that provides greater liability protection? The answer is pretty straightforward: the process of formation and its maintenance is simplified.
Sole proprietorship provides the least amount of difficulty in getting it set up. It requires only that you register the business with the right agency in your state, county, and city.
All other business establishments must be registered through the local Secretary of State. They also have to adhere to a set of recordkeeping rules to retain limited liability protections. Preserving these records and making sure that the business remains in great standing can be expensive and time-consuming. However, the protection from liability may just be priceless.
What Can You Do?
A tiny bit of prevention is worth a pound of cure. Whether you are just getting your business started or have seen your business through a few solid years, holding off on hiring a lawyer until you think you really need one can cost you. With the best help in choosing a business entity, your business may even outlast you.
Hiring a skilled business lawyer in the good times allows you to set a solid framework that will help your business to weather the bad. Your lawyer should understand your business’s specific conditions, allowing them to know as soon as possible where it stands when a legal challenge arises.
Conclusion
The bottom line is that this decision is one you won’t want to make alone. Get advice from a specialist about the best corporate form to take. It can make a huge difference later on in your business ventures.
