Choosing The Correct Business Structure
Of all the decisions that you will make when starting a new business, one of the most important is the type of legal structure to create for your company. Your decision on this issue will not only affect your management and the ownership choices throughout the life of the business, but it will also have a significant impact on your tax returns and the way you report profit and loss. Legal formalities, in the firm of paperwork, for your company, personal liability for the product or service if there is a lawsuit and your ability to raise money should also be given serious thought.
TYPES OF CORPORATIONS
There are two different kinds of corporations in U.S. A C Corporation is simply a corporation established pursuant to state law that elects to be taxed under Subchapter C of the Internal Revenue Code. It is taxed as if it is it’s only individual. Each year you must prepare a tax return for the C Corporation and pay corporate income taxes on its net income. Net income is what is left after all expenses are paid. If the corporation pays a dividend, those who receive the dividends will also pay taxes on the “income “ received. This is why the C Corporation structures is said to have it will subject “double taxation.”
S Corporations are established pursuant to Federal Law, Subchapter S of the International Revenue Code. The S Corporation is not originally formed as an S Corp. At first you create a C Corporation then makes an election to be an Corporporation when the entity meets the subchapters requirements, like it has no foreign members, whether individuals or foreign companies as shareholders. A great benefit of the S Corporation is that it does not pay taxes itself. It distributes its income or losses to its shareholders who then list that income on their personal tax returns. One of the reason that the S corporation is so popular is that if the corporation loses money, each shareholder is able to deduct a proportionate shares of loss on his or her tax return.
DIFFERENCES AMONG BUSINESS ENTITIES
TEIL forms various business structures and has experience in analyzing the proper business structures that is best for different types of business models. We can help you select the right form to fit your operation and tax requirements. In brief here are some other pros and cons of popular structures.
Corporations - A majority of the large companies in the world are registered as Corporations. The have limited liability, meaning that shareholders are only liable in a lawsuit for the amount of the investment but not their personal assets. Corporations are also required to perform certain formalities such as holding annual meetings and keeping detailed corporate records (minutes).The corporation becomes an entity to separate from those who founded it and those who handles the responsibilities of the organization. However, the primary disadvantage of the entity is the cost to form a corporation and the requirement of extensive record-keepings.
Partnerships - A partnership can be created very easily by two or more individuals who have the same and or different skills and networks to be benefit in profit wish to conduct business together. Unlike a corporation, in a partnership each partner is liable for the debts and legal responsibilities of the partnership and is also jointly and severally liable for the actions of the other partner. One of the advantage of a partnership is that it does not bear the tax burden of profits or the benefit of losses-profits or losses are “passed through” to partners to report on their individual income tax returns.Limited Liability Partnerships (LLP) - A limited partnership is similar to a general partnership with minor difference in liability. There are two types of partners in a LLP: general partners and limited partners. Limited partners have no responsibility in the partnership management and are only liable for their part of capital investment in the project. Also, a limited partner is not liable for the debts of the partnership. If a limited partnership defaults, creditors can only look to the partnership and the general partner for their debt payment. There are more detail regulations on how LLP are formed.
Limited Liability Companies (LLC) - Limited liability companies combine the traits of corporations and partnerships. This type of business structure enjoys the limited liability of a corporation and the eligibility for the pass-through taxation feature of a partnership. LLCs may also select any form of profit distribution.
To make the right decision on the very first step of entrepreneurship or businesses expanding is to get an understanding; and the second thing, that we highly recommend is to consult a business attorney before any decisions are made.