Common Types of Legal Entities
Before you file articles of incorporation, you should be familiar with the most common types of business formations and how they differ. You may even choose a business structure that is not...
Before you file articles of incorporation, you should be familiar with the most common types of business formations and how they differ. You may even choose a business structure that is not technically a corporation at all. Regardless of which one you choose for your business, the decision you make will have a lasting impact on your taxes, how you acquire investors, and how your company is structured.
The majority of for-profit companies are C-Corporations. The income of a C-Corp is taxed by the government and offers liability protection for the owners' assets against debts incurred by the company. A C-Corp can raise money through the sale of stocks and bonds - and if the owner of the company dies, the C-Corp will continue on after his passing. Disadvantages of the C-Corp include a complex structure to maintain, with rules and regulations that MUST be followed - and the double taxation which occurs as you pay corporate taxes as well as those taxes applicable to the distribution of dividends from the company
A Limited Liability Company (LLC) is NOT a corporation or a partnership but combine some of the advantages of both. An LLC protects you and your family's personal assets from seizure over business debts and gives the owner a great deal of flexibility as to how they structure their business. There are fewer ownership restrictions with an LLC (as opposed to an S Corp or C Corp) which has made them very popular with foreign business owners. Disadvantages of an LLC include the inability to sell stock in the company and the relatively short life (30 years) of the LLC.
An S-Corporation is like an LLC in that it provides personal protection against business debts, but without having to pay full-on corporate taxes. And if you need to raise capital, you can offer stocks and bonds in an S-Corp (something you can't do with an LLC). On the downside, there are a large number of rules and regulations surrounding an S Corporation which may be daunting to some. Check with an attorney who specializes in corporations to see if an S-Corp is right for you.
Sole Proprietorships and Partnerships
One of the most prominent features of the sole proprietorship (a company of one) or partnership is that they DO NOT allow for the protection of personal assets against business debt. Another difference is the way that owners of Sole Proprietorships and Partnerships are taxed. Corporations pay corporate income tax on profits, but SP and partnership owners file business income or losses on their personal income tax returns.