Congratulations! You’ve decided to start a business and you’re ready to hit the ground running. Your business idea is about to become a reality and the most important next step is to decide what type of business structure is best suited to your specific and unique business.
The legal business structure of your company impacts everything from taxes, to personal liability, to appropriate paperwork, all the way to the day-to-day operations. Before you officially and legally register your business with the state, obtain your necessary business licenses, and request the all-important tax ID number, you first need to determine what kind of business structure your company will operate as.
There are several factors that should influence your choice of business entity and it is best to meet with a legal and/or tax professional to help you choose a business structure that will best protect your business and personal assets, and be most advantageous from a tax perspective. The experienced team at Anderson Advisors can help you understand your legal rights and what business structure is best for your unique company.
Types of Business Structures
Consulting with an experienced business attorney can help you understand the pros and cons of each entity choice and how they may be suitable or unsuitable for your unique business needs and considerations. Common business entity choices include:
● Sole Proprietorship
● Limited Liability Company (LLC)
● C Corporation
● S Corporation
● B Corporation (only available in certain states)
● Hybrid Organization
LLC vs. Corporation
If you know that you do not want to operate as a sole proprietor—either for tax reasons, to protect personal assets, or simply because there will be multiple owners of the business, you may want to consider forming an LLC or a corporation. A simple overview of both business structures are as follows:
- Limited Liability Company (LLC): This business structure affords you protection against personal liability. Profits and losses are passed to you personally, however, your personal assets are protected and insulated from debts and liabilities of the business.
- C Corporation: This business structure legally separates and distinguishes the business from the owners. A c-corporation provides excellent and strong protection to an owner from personal liability and allows start-ups to seek outside capital investments.
- S Corporation: This type of business structure uniquely avoids the double taxation of a C corporation, however, some of the business’ profits and losses will pass to the owner personally.
Significant Legal Differences: LLC vs. Corporations
It is crucial to consider the differing legal consequences of an LLC and a corporation when choosing between these business structures. A qualified and experienced business law attorney can help you best decide what is the best business structure for your business.
- OwnershipOne of the main components that distinguish these two types of business entities relates to business ownership.
An LLC is owned by one or more individuals who are considered members of the LLC under state and federal law. Each member may own a different portion of the business or make different contributions to the LLC. These percentages of ownership in a business are referred to as ‘membership interest’.
A corporation is owned by shareholders who have purchased shares or stocks of the business. This type of business entity may have an ultimate goal of becoming a publicly traded company and offering shares of their company on the stock market or sell shares of its company to other interested individuals, that is not the only reason to consider this type of business structure. If your business goals include potential outside investors, you should talk to your business attorney about forming a corporation.
Tax considerations are one of the most significant determining factors influencing business entity choice.
An LLC can be taxed as a pass through entity or a corporation. A pass–through entitymeans that profits and losses of the business pass to the owners or members, who are taxed on businessincome in their personal income tax returns. A single–member LLC is treated as a sole proprietor for tax purposes and a multi–member LLC is treated as a partnership.
If you decide to operate your business as an LLC, you must ensure that your personal and business expenses are recorded separately to not “pierce the corporate veil.” If a court finds that you disregarded the LLC structure and were essentially running the business as an LLC, it will dissolve the LLC and may allow any creditors of the business to satisfy your business debts or liabilities by seizing your personal assets.
C or S Corporations affordyou the opportunity to pay yourself a reasonable salary as well as possible dividends. The salary must be reasonable for your type business. With a S-Corporation the income and loss from the business flows down to the shareholders. A C-Corporation is taxed on its profits and then at the end of the year, shareholders are taxed on their percentage of dividends. This can sometimes be referred to as ‘double taxation’ as shareholders are taxed at both the federal and personal level.
- RecordkeepingWhile each state has specific and unique laws setting forth requirements for operating your business, accurate record keeping should be maintained throughout the year whether you choose an LLC or Corporation business model.
An LLC is required to maintain records regarding business expenses and profits throughout the year. The IRS may audit any business, including an LLC. The record keeping requirements of an LLC are less overwhelming but still necessary. Contacting a business law expert can help you understand the specific records an LLC is required to maintain.
A type C or S Corporation has additional record keeping requirements. Typically, a corporation must hold an official corporate annual meeting and give notice to the state of the meeting. A corporation is also required to keep official corporate minutes of meetings, and file appropriate annual reports with both the state and federal government.
An LLC and a corporation can both be managed in different ways, but your entity choice will determine how you are allowed to manage your business legally.
As a smaller business, an LLC has more leniency regarding business operations and management, as well as who is allowed to manage an LLC. Oftentimes, an LLC is operated by its members, who are then also considered managers. In this case, the managers are usually very active in the day-to-day operations of the business. Other options include manager-managed LLCs, which are owned by one or more members who are not active in the regular operations of the business.
The day-to-day business operations of a type C or S Corporation are not managed by shareholders. A board of directors is elected to overs ee the entire business and establish policies and procedures regarding business operations. Officers of the business are charged with enforcement of these policies and procedures and over seethe daily operations of the company. The corporate bylaws must clearly articulate the requirements, rights, and responsibilities of shareholders, directors, and other company members.
An Advisor You Can Trust
Starting a new business opens a world of possibilities and opportunities. However, you may feel overwhelmed by the amount of significant legal decisions you must make to get your business up and running.
Meeting with an advisor you trust can help you to truly understand your legal options and choose a business structure that is most advantageous for you and your new business entity. Our team at Anderson Advisors welcomes the opportunity to help you navigate through these big decisions. Call our office at 800-706-4741 for a free consultation today