Types of Corporations
Every business understands how important its legal structure is. Their legal protections and taxes are based on the type of legal structure they’ve chosen. That is why understanding what you’re getting into with your business structure is key.
If you don’t mind taking personal responsibility for the debts of your business, then a sole proprietorship is great for you. But if you want to make your business a separate entity from yourself, then a corporation is the way to go.
What is a Corporation?
A corporation is a business structure that considers a business a separate entity for legal purposes. Because the business is a single entity, it is completely separate from its owners. That means that it has the same legal rights as a person.
It can be sued, enter contracts, borrow money, and hire employees on its own accord. This structure is great for business owners who want to limit their liability with the company.
Many people assume that only groups can form corporations for their businesses. In certain cases, a single individual can form a corporation.
Types of Corporations
If you’re interested in forming a corporation, you’ll have four types that you can choose.
These types include:
Limited liability companies (LLCs)
One of the most popular business corporations is limited liability companies (LLCs). They are one of the simplest structures to set up. Compared to other corporation structures, LLCs are easier to manage.
The greatest benefit of an LLC is that it grants owners limited liability protection. Through an LLC, all your business assets are separately owned by the business instead of you.
That means your business is liable for any debts or lawsuits, and your assets remain untouched.
There are also specific tax benefits that come with forming an LLC. LLCs do not have to pay federal income tax. Instead, the net profit or loss from the LLC is passed through to the owners’ personal tax returns. Then it is taxed as personal income by the IRS.
Some of the taxes that LLCs are liable for include property taxes on owned business property, sales tax on any goods purchased for the business, and payroll tax on employees’ salaries. These taxes are usually subtracted as business expenses instead of passed through to the owners’ tax returns.
An S Corp is a corporation that passes corporate income, losses, and tax deductions to its shareholders. Compared to a traditional corporation structure, S Corps are smaller. No more than 100 shareholders are allowed to form an S Corp.
For you to form an S Corp, you would have to meet the following requirements:
- Be incorporated in and do business in the United States
- Have 100 or fewer shareholders
- Have the correct type of shareholders
- Be an eligible type of corporation
The benefits of S Corps are that owners save so much money on taxes. Because S Corps are passed-through structures, they do not have to pay federal corporate tax. This means their money will not have to be taxed twice at the corporate and individual levels.
The shareholders’ personal taxes are also lowered through an S Corp. They can report their income from the company as a salary and lower the portion of their income that would be used to pay self-employment taxes.
If these tax benefits weren’t enough, the asset protection that comes with this business structure is ideal. The personal assets of the shareholders are separated from the company’s assets. That means your assets are protected if the S Corp is sued or through legal troubles.
S Corps are also easy in terms of transferring ownership. If you want to transfer your ownership of the S Corp, you can sell your shares to another shareholder.
What is a C Corp?
A C Corp is a business structure with more than 75 shareholders. This business structure is usually beneficial for businesses with plans to trade shares publicly through an Initial Public Offering (IPO).
One of the biggest legal protections of a C Corp is asset protection and unlimited ownership.
Like an S Corp, the shareholder’s assets are separated from the company’s assets. None of the shareholders’ assets will be at risk if the company experiences legal issues.
But unlike an S Corp, there is no limit to the number of owners. Ownership of the C Corp is based on whoever holds the company’s stocks. If the company’s stocks are publicly traded, the stocks can be purchased by members of the public.
With a C Corp, you would be responsible for filing a corporate tax return and paying taxes on your company’s profits. The post-tax income from your company will then be distributed to shareholders in dividends.
Then the shareholders will be taxed on those dividends, meaning that you and the other shareholders will be taxed twice on the same income. You also don’t have the luxury of deducting your company’s losses on your tax returns. Those losses can only be deducted from the company’s tax return.
Another corporation structure is a nonprofit. Nonprofits are the business structure for companies with a purpose that goes above and beyond making a profit. Any money your nonprofit makes will be donated to a specific cause that benefits the public.
People assume that nonprofits do not generate revenue. They do; it’s just that the money is placed back into the organization to pay for employee salaries and other business expenses.
The founders of nonprofits are not held liable for the organization’s debts. Even if the nonprofit does obtain a 501 © (3) status, it still has this legal protection. But once the nonprofit has a 501© (3) status, it can be tax-exempt. A nonprofit is tax-exempt and does not have to pay federal income tax on the profits earned.
Contact a Phoenix Business and Commercial Law Attorney Today
To determine the best business structure for you, reach out to The Law Offices of William D. Black today. Contact us online to schedule your free consultation.