According to the Small Business Administration, the first step of starting a small business is writing a business plan. The second step is learning as much as you can about business, which is why you should read this post before you get to the fifth step, which is filing for incorporation.
Incorporation is the act of declaring a new business in order to separate the organization from its owners and employees. All small businesses should seek incorporation to thwart personal liability for any business activity gone wrong. Unfortunately, there are several ways to incorporate a new business, which only adds to the confusion the self-employed experience when organizing their first business endeavor. To ensure that you choose the right type of business structure for you, you must learn more about the various options of incorporation.
Perhaps the most basic and advantageous feature of registering as a limited liability company, or an LLC, is the provided limited liability protection, which means that owners are not liable for any debts their companies earn. Additionally, an LLC gains pass-through taxation, meaning any profits and losses are reported through the owner’s individual taxes, not through separate entity taxes. On top of these, LLCs boast a surprising amount of flexibility when it comes to ownership:
- LLCs have no restrictions on number of owners
- LLCs may allocate profits and losses freely among owners
- LLCs lack rigid management structure requirements
- LLCs can have differing management classes
Thus, an LLC business should be appealing to entrepreneurs who anticipate early losses, need some give in management and accounting, and are generally disinterested in the formalities of business.
A subtype of LLC is the professional limited liability company, or PLLC. Most states require a number of professionals, including lawyers, doctors, accountants, engineers, and others, to earn licenses before they are able to practice, and frequently, these professionals are restricted from forming standard LLCs. In many cases, such professionals file instead for PLLCs, which afford many of the same protections and benefits but for a different class of business. An unlimited number of investors can hold stakes in the C corp, and the business can easily be transferred through sales of stock.
C corporations are the standard in American business. As such, incorporating under this type provides a number of expected benefits to business owners. For one, the liability protection ensures that shareholders are only responsible for the amount of money they initially provided the venture. For another, C corps are completely separate entities from their owners, which means:
- C corps continue to exist even when their owners pass away.
- C corps can easily transfer ownership through sale of stock.
- C corps must pay their own taxes, meaning owners do not automatically incur taxes on business earnings
Additionally, true corporation can provide legitimacy and credibility to ventures that simple proprietorship and partnership does not, and oftentimes, C corps are not audited nearly as frequently. Entrepreneurs should be interested in C corporation if they require venture capital, wish to lower individual taxes, and want the opportunity to sell the endeavor easily and efficiently.
In many ways, S corporations mirror C corporations in their style and function, but what sets S corps apart is in their manner of taxation. Like LLCs, S corps utilize pass-through taxation, which means the entity’s shareholders are responsible for reporting business profits and losses on individual tax forms. The benefit of this is the prevention of double taxation that can occur within C corps; when businesses and individual owners file and pay taxes, business earnings have the opportunity to be taxed twice: once from the business’s coffers, and once from the amounts owners take home themselves. S corps file a business tax return, but shareholders pay the actual tax. As a result, there are a few more restrictions on shareholders of S corps, including that they must number below 100 and they must be U.S. citizens.
Today, brand is everything, and many companies boast a number of brands that outwardly have little connection to their true incorporated names. If you want to maintain a proprietorship or a partnership, you should consider registering for a “Doing Business As” (DBA) license, which in some states is called a “fictitious business name,” “trade name,” or “assumed name.” Owning a DBA doesn’t necessarily provide the ample benefits of filing as an LLC or corporation, but it does legally allow businesses to operate under alternate names.
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