The Key Benefits of Creating a Business Entity
If you run a business as a sole proprietor under your own name, or a DBA, but have yet to legally form a business entity then you’ll want to be informed on the options available to you and their respective benefits. Forming a corporation or LLC requires some paperwork and minor fees but in most cases the effort and cost is small compared to the benefits.
The limited liability company or LLC
Most small business owners opt to form a Limited Liability Company (LLC) because of the flexibility and simplicity that this option affords. LLCs can be structured in nearly any way seen fit by the members and changes can be made with relatively little hassle as the company grows or evolves.
Perhaps the biggest benefit of creating an LLC, as opposed to a sole proprietorship or general partnership, is that your personal assets will be protected. Your home, for example, could not be sought by creditors to pay outstanding business debts.
Although other types of corporations will also allow you to limit personal liability, one advantage of an LLC is that business tax liabilities are passed through to members and the business itself is not taxed. The tax benefits, coupled with the simplicity and flexibility, make an LLC a great option for any company that plans to keep ownership restricted to a relatively small number of individuals.
The C Corporation
A standard corporation (commonly referred to as a C Corporation) is helpful for businesses anticipating venture capital funding because it affords more flexibility when multiple investors are involved (and is particularly helpful if those investors won’t be actively involved in day-to-day decisions).
Although C Corps are subject to the “double tax,” this option allows more legal options that offset heavy taxation than an LLC or sole proprietorship. Both the salary and fringe benefits (health insurance premiums etc.) of a shareholder would be tax deductible, for example.
An additional benefit to C Corps is that they can offer stocks and stock options can be a big incentive for keeping and/or attracting employees. C Corps are a terrific choice for companies expecting the type of expansion that would require numerous investors.
The S Corporation
The S Corp’s most attractive feature is pass-through taxation. Similar to LLCs, S Corps are not subject to taxation on the corporate level and personal level. Unlike LLCs, however, S Corps offer many of the benefits mentioned in the C Corp section above.
The key difference between the S Corp and C Corp is that S Corps face more restrictions than C Corps when it comes to those benefits. S Corps are not allowed to have more than 100 shareholders, for example. S Corps also cannot have non-US citizen shareholders. These restrictions do not apply to C Corps. S Corps do have stocks (and the stock options that come with them) so they offer that advantage over LLCs but these stocks are restricted to a single class whereas C Corps are allowed more diversity in stocks.
The S Corp is a great choice for companies that anticipate growth outside of the local market but do not anticipate expanding internationally.
At Cutler } Riley Law, we offer free initial consultations for you and your business. We can help you decide what type of entity best fits your business’s needs.