|
Getting Started… Also see: FAQ
Introduction
Is a Corporation or LLC right for my business?
What is a Corporation?
Structuring Your Business
What type of entity should I form?
Introduction…
Business start up – types of incorporation and company formation. When you start a business you need an experienced firm who can assist you properly with your company formation. Discover the advantage of corporations and which type of incorporation is right for your business start up.
Starting a business puts you in the driver's seat. There is no greater reward in life than being your own boss. Starting a business requires focus and careful planning. You must follow many steps of company formation before you can incorporate a business and begin opening the doors.
Before you start a business, you must learn the advantage of a corporation and decide which of the types of incorporation and business structure are most suitable for your company formation. The law requires several company formation formalities before it will recognize and incorporate your business. Further, these business start up formalities change depending on the type of company formation you are considering, as well as the jurisdiction you are considering filing in.
A Professional and Experienced Incorporation Firm is a necessity to incorporate a business correctly from the beginning. Only an experienced firm can ensure that your business structure is tailored to your needs of business formation. National Business Incorporators, Inc., is an experienced incorporation firm available to incorporate your business and set you on the road to success. We have the expertise to help anyone start and incorporate a business.
For business start up, types of incorporation and company formation, you need an experienced firm who can assist you with proper company formation to incorporate your business start up. Discover the advantage of a corporation and which type of incorporation is right for your business formation.
Is a Corporation or LLC right for my business?
There are many types of business entities, the simplest being sole proprietorship and general partnerships. While these may be easiest to form, they offer no personal liability protection and no significant tax advantages for their owners. Forming a Corporation or Limited Liability Company will protect your personal assets (homes, cars, investments, etc.) from any possible creditors; liabilities or lawsuits brought against the business. Incorporating will make your business more credible and attractive to customers and investors. In addition, these types of entities offer numerous tax advantages for owners and shareholders. We do suggest that the selection of a business entity be done with the assistance of a professional, such as your tax or legal advisor, as they may be more familiar with your specific needs.
What is a Corporation?
A corporation is a legal entity created through the laws of its state of incorporation. Individual states have the power to promulgate laws relating to the creation, organization and dissolution of corporations. Many states follow the Model Business Corporation Act. State corporation laws require articles of incorporation to document the corporation's creation and to provide provisions regarding the management of internal affairs. Most state corporation statutes also operate under the assumption that each corporation will adopt bylaws to define the rights and obligations of officers, persons and groups within its structure. States also have registration laws requiring corporations that incorporate in other states to request permission to do instate business.
There has also been a significant component of Federal corporations law since Congress passed the Securities Act of 1933, which regulates how corporate securities are issued and sold. Federal securities law also governs requirements of fiduciary conduct such as requiring corporations to make full disclosures to shareholders and investors.
The law treats a corporation as a legal "person" that has standing to sue and be sued, distinct from its stockholders. The legal independence of a corporation prevents shareholders from being personally liable for corporate debts. It also allows stockholders to sue the corporation through a derivative suit and makes ownership in the company (shares) easily transferable. The legal "person" status of corporations gives the business perpetual life; deaths of officials or stockholders do not alter the corporation's structure.
Corporations are taxable entities that fall under a different scheme from individuals. Although corporations have a "double tax" problem --both corporate profits and shareholder dividends are taxed -- corporate profits are taxed at a lower rate than rates for individuals.
C Corporation type is the most common structure in the business world. Click Here to file your C Corporation or Contact Us directly to discuss specific needs.
Structuring Your Business
The way your business is organized is important because it affects every aspect of your operation, from what you pay in taxes to the extent of your liability and your ability to raise capital. Your options for business organization include sole proprietorship, incorporation, partnership, limited liability corporations and partnerships, and special corporations such as professional and non-profit corporations.
There are a lot of opinions about business structure, so be sure you make a decision only after thorough research and careful consideration of what is best for your business. Remember that you can alter your business structure as your needs and requirements change. You're not locked in to keeping a specific structure if it no longer serves your company.
This overview is designed to assist you in making this key decision by giving you information on the basics of the various business structures. Once you've read it through and done your research, you might want to contact your attorney or accountant and seek his/her input and guidance.
C Corporation
Closed Corporation
S Corporation
Limited Liability Company
General Partnership
Limited Partnership
Professional Corporation
Non-Profit
What type of entity should I form?
General Corporations (C Corporation)
C Corporation, discover the C Corporation definition and advantages of this business formation.
The General or C Corporation is the most common legal entity and offers the greatest flexibility with respect to ownership and the free transferability of ownership interest. Although a C Corporation allows for many advantageous tax deductions and benefits, small business owners may be at a disadvantage due to the double taxation associated with a C Corporation. Income is first taxed at the corporate level at corporate tax rates. Then when the corporation issues dividends to its shareholders, the same money is taxed again at shareholder level. Still, larger businesses may benefit from forming as a C Corporation.
Advantage of forming a C Corporation:
- Limited liability protection
- Unlimited life
- Easy to raise capital
- Flexibility of ownership
- Allows issuance of classes of stock
- Free transferability of ownership
- Tax benefits allowing for certain health and life Insurance deductions
Disadvantage of forming a C Corporation:
- Subject to governmental regulations
- Double taxation
- Must maintain corporate formalities
Form a C Corporation with the guidance of our experienced staff. Click Here to file your C Corporation or Contact Us directly to discuss specific needs.
Close Corporations
Closed Corporation, discover the Closed Corporation definition and advantages of this business formation.
The Close Corporation can be desirable for small businesses. A Close Corporation is issued stock held by one person or not to exceed thirty. All stock is subject to restrictions of transfer and if a shareholder shall elect to sell, the stock must be offered to the corporation or to any other shareholder.
Advantage of forming a Closed Corporation:
- Close Corporations can eliminate the need for a board of Directors, and remove the Authority.
- Close Corporations are allowed to choose the right to restrict the transfer of stock Shares to its shareholders.
- The shareholders can authorize the use of proxies for directors’
Disadvantage of forming a Closed Corporation:
- If the board is removed, a Close Corporation’s stockholders usually have more responsibilities and duties
- If a Close Corporation would like to elect the status of S Corporation Later on during life, a Close Corporation with thirty-five members may not be able to do so.
- Close Corporation status does not exist in every state, so trying to qualify in another state to do business may be a problem if that state does not allow close corporations.
Form a Closed Corporation with the guidance of our experienced staff. Click Here to file your Closed Corporation or Contact Us directly to discuss specific needs.
Subchapter S Corporations (S Corporation)
S Corporation - Discover the disadvantage and advantage of forming an S Corporation.
A Subchapter S Corporation or S Corporation is similar to the C Corporation and operates in the same manner. The main advantage associated with the S Corporation is that the income passes through the shareholders, thus avoiding the double taxation of a C Corporation. However, the corporation must meet certain requirements to qualify for the “S” status under the current IRS rules. It also loses some of the tax deductions allowed to C Corporations.
Starting an S Corporation is ideal for smaller businesses looking to take advantage of the special tax status and income flow that S Corporations offer. Discover the disadvantage and advantage of S Corporation for your business formation.
Advantage of forming an S corporation:
- Limited liability protection
- No “double taxation”
- Unlimited life.
- Must maintain corporate formalities
- No more than 75 Shareholders
- Limited ownership (individual, estates and certain trusts)
- Limited to one class of stock
- S Corporation income flows without the "double taxation" occurring in C Corporations
- There is a special status providing a tax advantage for S corporation.
Disadvantage of forming an S Corporation:
- Subject to governmental regulations
- Some tax deductions are lost as compared to the C Corp
- The S Corporation business is limited to no more than 75 shareholders.
- No S Corporation shareholder may be a nonresident alien
Form an S Corporation with the guidance of our experienced staff. Click Here to file your S Corporation or Contact Us directly to discuss specific needs.
Limited Liability Company (LLC)
Limited Liability Company (LLC) - Discover the disadvantage and advantage of forming an LLC
Limited Liability Company or LLC, are a relatively new development in the business market. This type of entity combines the limited liability protection of a corporation with the simplicity and tax advantages of a partnership and individually owned businesses. Many feel the LLC is most beneficial and perfect for businesses with a small number of owners, who intend to act as or are currently acting as a partnership with the need for personal liability protection or small business owners or investors looking to hold real estate or individuals looking for more control and flexibility in managing their business than that offered in corporations. Further, limited liability companies are not restricted from foreign owners or investors like s-corporations, which means they are perfect for receiving foreign investment. Increasing numbers of new businesses are now enjoying the benefits of forming as, or converting their existing partnership to a Limited Liability Company.
Advantage of forming an LLC:
- Limited liability protection
- No “double taxation”
- Simple structure and operation
- Less record keeping and formalities
- Easy conversion from existing Partnerships
Disadvantage of forming an LLC:
- Relative new entity that lacks uniform state law treatment
- Usually limited life (not perpetual existence)
- Restrictive transferability of ownership
- Possible dissolution upon death or resignation of an owner
Form an LLC with the guidance of our experienced staff. Click Here to file your LLC or Contact Us directly to discuss specific needs.
Some advantages of a C Corporation vs. an LLC:
- Profits of a C Corporation are not subject to social security and Medicare taxes.
- Banks are more willing to loan money to a C Corporation than an LLC company.
- Form a C Corporation for greater fringe benefits than an LLC company.
- Although a C Corporation is subject to double taxation, there is greater tax flexibility.
General Partnership
If you have business partners, you have the option of forming a partnership instead of incorporating. Should you choose this route, experts highly recommend that you formalize this relationship by creating a written general partnership agreement that will protect all parties involved. It is possible to have a partnership without a formal agreement, in which case you will be governed by the Uniform Partnership Act, but this allows for little flexibility or protection in events such as one partner leaving. A written contract, on the other hand, will spell out exactly what each partner's rights and responsibilities are.
The chief benefit of a general partnership is that you have someone with whom to share the business burden. It will also probably cost less and require less paperwork to form a partnership than a corporation. In addition to the written partnership agreement, you may have to file a partnership certificate registering the company's name, and perhaps obtain a business license as well. These requirements vary from state to state and locality to locality, so check with your county clerk's office to find out the specific requirements for your region.
If you do form a partnership, each year you have to file a partnership information return that tells the IRS and state officials how much the partnership earned or lost, and how those gains and losses are to be divided among the partners. The partnership itself does not pay income taxes. Instead, the partners report this information and pay taxes on their shares on their personal returns, similar to a sole proprietorship.
The downside of partnerships is that you are personally responsible for your partner's liabilities related to the business. One partner can take actions - such as signing a contract - that legally bind the partnership entity, even if all the partners were not consulted. Each partner is also personally liable for injuries caused by one partner on company business. In other words, if one partner causes an accident while making a delivery with the company van, all partnership assets, as well as each partner's personal assets, are at risk. Of course, a partnership can protect itself against such risks by carrying the proper insurance.
Benefits
- Provide a way to share the business burden
Simpler paperwork and less cost than incorporation
Disadvantages
- All partners personally liable for the business actions of a single partner
Limited Partnership
Limited partnerships are typically used for real estate investing or in situations where a business is looking to finance expansion. For most small businesses, forming a general partnership or an S corporation will meet their needs.
In circumstances where they are appropriate, limited partnerships provide many of the benefits of partnerships and corporations. They provide a way for small businesses to raise money without taking in new partners, forming a corporation, or issuing stock.
A limited partnership must have one or more general partners, who have the same responsibilities and liability restrictions as they would in a general partnership. In addition, there are one or more "limited" partners, typically investors not involved in the day-to-day activities of the company.
These limited partners are not personally liable for debts of the partnership, and they get the same tax advantages as a general partner. However, they do have significant restrictions. They cannot, for instance, be involved in the management of the company (with few exceptions). If they are, they may become personally liable for the partnership's debts.
Creating a limited partnership can be as complex and costly as forming a corporation. It is advisable to hire an attorney to assist you in conforming to the various filing requirements in your state.
Benefits
- Ability for partnerships to raise money without involving outside investors in day-to-day business decisions
- Limited partners get limited personal liability and greater tax advantages
Disadvantages
- Complex and costly filing procedures
- General partners still have personal liability for company's debts and actions
Professional Corporation
Groups of certain professionals can form corporations knows as professional corporations or professional service corporations. The list of professionals covered by professional corporation status differs from state to state; it typically covers accountants, engineers, physicians and other health care professionals, lawyers, psychologists, social workers, and veterinarians. Typically, these professionals must be organized for the sole purpose of providing a professional service - for example, a law corporation must be made up of licensed attorneys.
In certain states, this is the only incorporation option available for certain professionals, whereas in others, they are given the choice of being either a professional corporation or S or C corporation. Contact your states filing office to see what options are available in your state.
According to tax and legal experts, there is no longer a significant tax benefit to professional corporation status over sole proprietorship or partnership. The IRS treats most professional corporations as "personal service corporations", taxing corporate income at a flat rate of 35%.
Professional corporations can shield owners from liability. While it can't protect a professional from his/her own malpractice liability, it can protect against liability from negligence of an associate. Malpractice insurance is still the way to go for most professionals, however. Still, you might want to consider this corporate status as a back-up against rising rates or inadequate coverage.
Benefit
- Owners not liable for negligence of other owners
Disadvantages
- Higher cost and more paperwork than a sole proprietorship or partnership
- Ownership restricted to members of a certain profession
Non-Profit Corporation
The primary benefit of being a non-profit (or not-for-profit) corporation is that you are exempt from paying income taxes. You must qualify for tax-exempt status under the Internal Revenue Code Section 501(c)(3). Should you attain this status, not only is your corporation exempt from paying taxes, but people, corporations, or other organizations that contribute to your corporation can take a tax deduction for those contributions.
There are other benefits, too. For example, if you do a lot of mailings, you can qualify for the lower "non-profit" postal rate. Plus, there is the positive image a non-profit connotes: it tells people that you're in business not for the money but for a higher purpose.
Typically, tax-exempt status is reserved for corporations formed for religious, charitable, literary, scientific, or educational purposes. This could include: child care centers, museums, research institutes, dance or music groups, places of worship, schools, community groups, and others.
Of course, you don't make money from a non-profit company; once you put assets in, they become property of that corporation and must be dedicated to specific non-profit purposes. And you can't sell the business to get your money back. A non-profit company goes on; if it is sold, liquidated, or otherwise ends, the assets must be passed to another non-profit corporation.
There are other responsibilities and restrictions to running a non-profit business, too numerous to list here. If you are seriously considering forming a non-profit corporation, you might want to get in touch with legal and/or tax counsel that specializes in this area.
Benefits
- Tax-exempt status
- Contributions are tax deductible
- Helps project an altruistic image for company
Disadvantage
- Tax advantages limited to companies formed for religious, charitable, literary, scientific or educational purposes.
National Business Incorporators
E-mail: nationalbusinessincorporators@gmail.com
|
