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One of the first steps you should take in forming your business is determining which entity type is best for you. Limited Liability Companies and Corporations are both far better choices than a Sole Proprietorship for business owners who wish to reduce their personal liability while increasing their credibility.
Since both a Corporation and a Limited Liability Company offer personal limited liability and both increase your credibility, what is the difference between the two entity types? To help answer that question, we have outlined each business stucture below.
There are two different types of Corporations, an S Corporation and a C Corporation.
S Corporations
are registered as a C Corporation at the state level and then elects to be treated as a subchapter S Corporation by filing the appropriate forms with the IRS within the required time frame alloted from the state incorporation date. Approval from the IRS is required. S Corporations are recommneded for owners wanting limited personal liability protection combined with the simplicity of pass through taxation of income/losses which avoids the double taxation of a C Corporation.
- Is limited to 100 Shareholders (Owners)
- May only have one class of stock, preferred stock is not allowed
- Must use the calendar year as its fiscal year in most cases
- Not taxed at the corporate level
- Income/loss passes directly through to shareholders, in proportion to each shareholders ownership interest
- Shareholders are typically not liable for corporate debts
- Requires a formal board and shareholder meetings
- Annual reports at the state level
- Adopts corporate by-laws and record minutes from shareholder meetings
- Business duration can be perpetual
- May issue shares of stock to attract investors, referred to as Shareholders (Owners)
C Corporations
are registered as a C Corporation at the state level. C Corporations are recommended for owners needing tax and ownership flexibility combined with limited personal liability protection.
- Can have an unlimited number of Shareholders (Owners)
- Authorized to issue different classes of stock; common stock and preferred stock
- Taxed at the corporate level
- Dividends paid to shareholders, also taxed at personal level (often referred to as double-taxation)
- Shareholders are typically not liable for corporate debts
- Requires a formal board and shareholder meetings
- Annual reports at the state level
- Adopts corporate by-laws and keeps minutes from shareholder meetings
- Business duration can be perpetual
- May issue shares of stock to attract investors, referred to as Shareholders (Owners)
Limited Liability Companies
are a relatively new type of business entity and is formed at the state level. Limited Liability Companies are recommended for owners wanting the simplicity of pass through income/loss taxation and personal limited liability protection combined with less formalities.
- No ownership restrictions
- Fewer corporate formalities, no board of directors required and no shareholder meetings/minutes
- Owners are referred to as members, L.L.C.'s can be managed by the members or by a manager
- Not taxed at the corporate level, by default
- Income/loss passes directly through to members, doesn't have to be in proportion to each members ownership interest
- Members are typically not liable for corporate debts
- Drafts an Operating Agreement, which outlines the management of the organization
- Business duration varies by state and may not always be perpetual
If you still need assistance in determining which entity structure is right for your business, please contact us today to schedule your free start-up consultation.
Thank you,
IncAssist, LLC
Experience you can trust, prices you can afford!
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