How To Structure Your Incorporated Business
Incorporated businesses are also known as corporations and have existed for quite a long time in the economic landscape. As The Houston Chronicle notes, corporation structures can be a double-edged sword. An incorporated business is the perfect business structure for some companies. In other cases, it might be too complex to consider, especially if a business is one that doesn’t have a lot of “moving parts.” Structuring an incorporated business takes consideration from the business owner. However, there’s not much information as to where business owners should start when exploring corporation structures.
Understanding Business Incorporation
When a business becomes incorporated, it shifts from a sole proprietorship to a business recognized by its state of incorporation. This qualification sets it apart from the individuals that formed the business. Due to this delineation, the incorporated business has its own assets, holdings, even money. The business owner can use the registered business to protect their own personal assets and capital. Because of how the public views incorporated businesses, a business owner has the benefit of legitimacy in business dealings because of their corporate identity. Incorporated businesses can be limited liability companies (LLCs) or corporations. Corporations are further divided into S Corporations and C Corporations. Each of these business structures brings a different set of pros and cons for a business owner.
The Limited Liability Company (LLC)
An LLC is a relatively new business structure, but it’s not complicated and suitable for new business owners who have never owned a company before. LLCs allow for flexible management and can even be formed with just a single person as the business owner in some jurisdictions. LLCs provide protection for the owners’ assets. If the business is brought to court for a suit, the settlement cannot include any of the owners’ assets. In an LLC, the members own a percentage of the company. The business has an operating agreement that defines how the business will be run and its management structure. The operating agreement will also determine how profits are distributed when the company needs to do so. In some cases, profit sharing is not in the same proportions as ownership.
LLCs, being private businesses, can never go public. Depending on the state, taxation may impact the company significantly. LLCs have the option of being taxed as a corporation. On occasion, this could lead to double-taxation from both the state and federal levels (as mentioned further down). If the business is registered as an LLC, the IRS sees it as a pass-through business entity and doesn’t tax it. Instead, the owners are required to report their earnings from the LLC as taxable income. The IRS then taxes each individual member based on their earnings. If the company records a loss, it is also registered on the owners’ taxes. While it might be difficult to transfer ownership of the LLC to someone else, the business can be easily dissolved if it ceases operations.
C Corporations
Most corporations you’ll encounter in the US are C Corporations. C-Corps have been around for more than a hundred years. One of the most notorious corporate structures was John D. Rockefeller’s Standard Oil Company. When filing for a C Corporations, the business owners are required to fill out more paperwork. The legal requirements for corporations are also more involved than LLCs. C Corporations have rigid management structures that must be adhered to. When corporations are set up, they have a board of directors that oversee the company’s operations. Owners of the corporation have shares of the business in the form of stock. The shareholders may choose to appoint one of their own as a manager or hire a manager that will help beneficially direct the company in keeping with the board’s aims.
Unfortunately, C Corporations are subject to massive tax rates. Income taxes are usually taxed twice (known as double taxation). Business owners pay taxes on profits, as well as their own individual earnings. Shares of stock as issues to all owners equally, but those owners can freely trade stock among themselves. Like the LLC, C corporations protect their owners from liability by limiting the exposure of their assets to litigation.
To learn more about corporations, click here.
S Corporations
S corps are a more modern iteration of C Corporations. It has much of the same business structure as a C Corporation, but it isn’t subject to double taxation. Just like a C-Corp, an S-Corp has a board of directors and shareholders that own portions of the business’s stock. Instead of taxing profits at the business level, they go through the individual shareholders’ personal tax returns. If the corporation has a loss, it can be recorded as a deduction on the shareholders’ taxes. Unlike C Corporations, S-Corps cannot offer shares as an incentive to employees. The shareholders cannot be non-residents of the country. There’s also a limit to the maximum amount of shareholders that an S-Corp can have.
What Structure Works Best?
The truth is that any of these structures are miles better than a sole proprietorship. Each of these business structures provides some level of asset protection that is crucial to any budding business owner. LLCs are relatively cheap to set up, and you don’t even have to live in the state where it exists. On the other hand, corporations require a person to be a resident and have a lot of paperwork that needs to be filed and updated regularly. Taxes on LLCs and S-Corps tend to be a lot lower than those that members of C-Corps have to pay. You can even switch between the business structures with a company. However, doing so too often might raise suspicion from the authorities. LLCs can operate as either C-Corps or S-Corps for taxation purposes, which remains among the most flexible options. The lack of public share offer limits its ability to raise capital for expansion, unfortunately. Discussing your options with a lawyer skilled in business incorporation can give you better insight into what would be the best structure for your business. There’s no one-size-fits-all for business incorporation. However, incorporating a business brings enough benefits to the table that you should seriously consider it as a business owner.
