Choosing the Right Business Entity - Corporation
In this blog, we discuss the following:
Choosing a business structure is similar in the sense that it reminds us of choosing which university to attend as we were preparing to leave the last year of high school. You either know which university to attend, you’re unsure where to start, or considering a few options based on your needs and wants.
Choosing where to start your next new journey is the same as finding the right business structure, as it is one of the first steps to starting a business. It can sound daunting but, it doesn’t have to be a tough decision once you understand the differences and what you’re looking for. Luckily, unlike universities, there are just a few to pick from. There are four main business entity choices: sole proprietorship, partnership, limited liability company (LLC), and corporation. In this blog series, we go over the advantages and disadvantages of each, starting off with corporations.
Advantages of Corporations
C Corporation
The SBA says a corporation, sometimes called a C corp, is a legal entity that's separate from its owners.
Corporations can make a profit, be taxed, and can be held legally liable.
Corporations are best for businesses that are planning to grow exponentially or go public.
Big investors typically prefer to invest in corporations.
S Corporation
An S corporation, sometimes called an S corp, is a special type of corporation that's designed to avoid the double taxation drawback of regular C corps.
S corps allow profits, and some losses, to be passed through directly to owners' personal income without ever being subject to corporate tax rates.
If a shareholder leaves the company or sells their shares, the S corp can continue doing business relatively undisturbed.
Disadvantages of Corporations
C Corporation
It pays corporate income tax on its net earnings, while shareholders are taxed on the dividends from those net earnings.
More effort to maintain than other business structures.
Corporations are more expensive than informal business structures such as sole proprietorships that don’t need to register.
S Corporation
S corps have a 100-person cap on shareholders and have strict shareholder requirements
Harder to raise equity financing than C corps
More scrutiny from the IRS, especially with regard to the balance of salary payment versus dividends.
How to Form a Corporation?
Another downside to considering a corporation is that there are more legal procedures required. Although most states differ and vary, here are the general steps to forming a C corporation:
Choose a business name
Determine where to register
Settle on incorporation location
Name registered agent
File for an employer identification number (EIN)
File Articles of Incorporation
Complete company bylaws
Set up the board of directors
If you are considering C corporation, click here to determine some of the forms you may be required to file.
Filing an S Corporation
According to the IRS, you can file for an S corp if you meet the following criteria:
Registered as a domestic corporation
Have allowable shareholders
May be individuals, estates, and certain trusts
May not be partnerships, corporations, or non-resident alien shareholders
Have no more than 100 shareholders
Only one class of stock
Be an eligible corporation
For most small businesses, every penny counts. So, depending on who you go talk to, the recommendations can vary. A tax consultant might advise you based on your tax situation. A bookkeeper will have a different viewpoint for ease of data entry. Talk to a lawyer and you’ll get suggestions from the asset and liability protection side of things. You can talk to a financing expert and they can give you the best opportunities for obtaining credit and capital. Talk to investors and they’ll have a specific type of entity they will only invest in. A branding expert can give the best entity just based on the image and marketability of your company. No two businesses are the same. So make sure to talk to a professional to make the best decision for you and your business. Determine if a corporation is right for you. You can contact us today for a consultation.