When starting a new business, one of the first major decisions you will make is deciding what type of corporation will be right for you. Different business structures come with different benefits and burdens. The type of corporation you choose to form will lay the foundation for the rest of your business’s growth and development. In order to determine what type of corporation is right for your business, you must weigh the pros and cons of each structure and see which one will suit your business interests.
A corporation is owned by its shareholders. The shareholders must elect a board of directors. The board of directors is tasked with overseeing the day to day running of the business and that every decision is made to benefit and support business objectives. With this structure, the business is considered an entity separate from the owners. The benefit of this is that the owners have limited liability and their personal assets are safe from the reach of any creditors of the business. Additionally, corporations generally enjoy a lower tax rate. A corporation, however, can be very difficult and expensive to set up. There is a great deal of paperwork that must be filed prior to starting a corporation.
Each type of corporation has its own benefits and restrictions. Here are types of corporations you may want to use for your business:
- S Corporation: When a corporation meets the Internal Revenue Code requirements under Subchapter S, the corporation is considered an S corporation. An S corporation provides shareholders the benefits of a corporation, but it is taxed as a partnership. An S corporation has substantial tax advantages while allowing for flexibility in ownership. Generally, an S corporation is not taxed separately from its owners.
- C Corporation: A C corporation is taxed separately from the owners or shareholders. It does provide limited liability. A C corporation, however, is subject to corporate income taxes. A corporation is usually automatically established as a C corporation unless it elects to be treated as an S corporation.
- Limited Liability Corporation (LLC): One of the main benefits an LLC provides that is not the case with an S corporation or a C corporation is that there is flexibility in the structure and management of the business as well as having fewer recordkeeping requirements. In addition to this benefit, an LLC provides for pass-through taxes. Also, the LLC will protect your personal assets.
Choosing the type of corporation that will be right for your business is both a difficult and important decision. What corporate structure you select for your business will have a big impact on how you run your business as well as how your business is taxed. Make a time investment in weighing your options. Contact our knowledgeable business law attorneys at Fairfax Law Firm. We will help you analyze your business options and guide you as you select which corporate structure will best serve your business.