By Brett Davis
The Company Corporation®
Selecting a business structure is one of the most important decisions business owners make, with wide implications for their financial success. Business structure affects safety of personal assets, taxation and smooth continuation of the business upon ownership change.
Many businesses start out as sole proprietorships or partnerships. Both of these structures provide management flexibility. The primary risk to sole proprietors or partners, however, is personal liability for company debts. As a result, many business owners opt to incorporate or form a limited liability company (LLC) to protect their families and financial interests. Businesses may change structure at any time. Here are the five most critical items to consider when selecting-or re-selecting-your business structure.
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Protection of personal assets-Sole proprietors and partners have unlimited personal liability for business debt or law suits against their company. Creditors can attach homes, cars, savings or other personal assets. Incorporating or forming an LLC helps separate your personal identity from your business identity. Corporation shareholders or LLC members have only the money they put into the company to lose.
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Pass-Through Taxation-For sole proprietors and partners, company profits/losses pass directly through to their personal tax returns. For corporations, profits are taxed, then the profits that are distributed to shareholders as dividends are taxed again on the personal level. This "double taxation" can be avoided while still enjoying the benefits of personal asset protection by forming an LLC or by electing an S Corporation. S Corporations and LLCs are taxed just like partnerships.
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Tax Deductible Employee Benefits-Incorporating or forming an LLC usually provides tax-deductible benefits for you and your employees, an advantage that sole proprietors and partners do not typically enjoy. Even if you are the only shareholder or employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may now be deductible. Best of all, corporations and LLCs usually provide an increased tax shelter for qualified pensions or retirement plans (e.g. 401Ks).
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Uninterrupted business-Sole proprietorships and partnerships may automatically end or become legally entangled when one owner dies or retires. Corporations and LLCs are enduring legal business structures. They may continue regardless of individual officers, managers or shareholders. Corporation ownership may be transferred, without substantially disrupting operations, through sale of stock.
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Access to Capital-Sole proprietorships and partnerships may find investors hard to attract because of personal liability. Investors are more likely to purchase shares in a corporation where there is a separation between personal and business assets.
With over 100 years of experience, The Company Corporation® and its affiliated companies provide expert incorporation services to small businesses and entrepreneurs nationwide. In addition to filing corporations and limited liability companies in all 50 states and the District of Columbia, The Company Corporation® offers a wide range of products and services that help businesses preserve and protect their corporate status. We provide registered agent services, Tax-on-Time® and mail forwarding services, corporate kits, publications, certificates of good standing and qualifications to do business in any state. Our commitment to the success of small businesses does not end there. Our exclusive, Compliance Watch online reminder and calendar service takes the worry out of staying in corporate compliance. For more information on small business incorporation and business services, contact 1-800/941-2627, email info@corporate.com or visit our web site at www.incorporate.com/score.
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