Which Business Structure Is Right?

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Should I form a C-Corp, S-Corp or LLC?

Why incorporation is necessary

Incorporating is essential to the success of any business. The process of incorporating entails the preparation of certain documents, including a document referred to as the "Articles of Incorporation," and filing the documents with the Secretary of State. (For an LLC, the main document used to incorporate is referred to as the “Articles of Organization.”)

Below is an explanation of why it is necessary for every business to incorporate. In my opinion, the two primary advantages of incorporation are discussed, as are the risks involved in operating an unincorporated business.

Shield yourself from liability

The most important reason to incorporate your business is to protect yourself from business liabilities. If you are operating an unincorporated business, its creditors may be able to reach your personal assets. Assets such as your personal residence and personal bank account can be used to pay business debts or to satisfy a lawsuit against your business. If you incorporate, business creditors cannot reach your personal assets, as an incorporated business and its owners are separate entities.

Gain tax advantages

If you incorporate your business, there are tax deductions for a wide variety of operating costs which will substantially cut back your company's overall tax liability. These deductions may include the cost of materials/production, employee wages, the cost of insurance, the cost of retirement plans, as well as business travel and entertainment expenses.

All Corporations and LLCs generally shield their shareholders from personal liability arising from business debts and business lawsuits.

C-Corporation

Traditional and most common type of corporation is generally taxed more than S-Corp or LLC.

Advantages

  • Limits personal liability from business debts and business lawsuits
  • No restrictions on ownership
  • Easy to transfer stock
  • C-Corporations can offer public stock
  • Formation state fee may be less than LLC

Disadvantages

  • Profits are "double taxed" meaning taxed at corporate and individual level

Companies that choose to be C-Corporations are often:

  • Large companies
  • Publicly traded companies
  • Companies that are seeking investment from passive investors who prefer to not be taxed as company grows

S-Corporation

Similar to C-Corp, with some advantages for qualified small businesses.

Advantages

  • Limits personal liability from business debts and business lawsuits
  • Potentially favorable taxation; avoids the "double tax" of a C-Corp
  • May also avoid the "self-employment tax" that is common for most LLCs

Disadvantages

  • No more than 100 company shareholders
  • All shareholders must be U.S. citizens or lawful permanent residents and not other corporations or LLCs

Companies that choose to be S-Corporations are often:

  • Selling products (retail, wholesale)
  • Selling services with employees and or independent contractors
    Service companies with no employees are often LLCs

LLC (Limited Liability Company)

The newest type of company with the most flexible management structure.

Advantages

  • Limits personal liability from business debts and business lawsuits
  • No restrictions on ownership
  • Formation and ownership requirements are less stringent than with C-Corp or S-Corp

Disadvantages

  • Some states require LLCs to have more than one member
  • Transferring ownership is more complicated than with C-Corp or S-Corp
  • Potentially higher taxation than S-Corp

Companies that choose to be LLCs are often:

  • Service companies where the owner is providing a service, e.g. graphic/website design, dog walking, cleaning services
  • Real estate investment companies
  • Smaller companies with international investors
  • Smaller companies with entity investors
  • General investment companies