Form a Corporation
Protect your assets and create a structure for investment.
Forming a corporation limits an owner’s legal and financial responsibility for the activities and debts of the business. Plus, incorporation provides a structure that can attract potential investors, and may help a new business establish credibility with customers and potential partners.
What is a C corporation?
A C corporation, also referred to as a general for profit corporation, is one of the most common entity types chosen by new businesses. One of the reasons for their popularity is that the C corporation provides a business with the ability to deduct certain benefits, like employee health insurance and dental plans, which can add up to substantial savings per year. Additionally, corporations allow the issuance of stock, which is a benefit for entrepreneurs and venture capitalists who may want to invest in your business.
How does forming a corporation protect the owners of a business?
Forming a C corporation defines a business as its own legal entity, separate from the owners of the business. This prevents your personal assets such as your home, vehicles, or other holdings from being targeted by creditors to pay debts accrued by the business.
A properly formed C Corporation protects its owners from this liability. For example, if under unfortunate circumstances your company should face a lawsuit, the assets of the corporation would be targeted, not the assets of the owners. C corporations also retain their own credit rating, separate from that of the owners.
In the event of loan default or other credit-related issues, your personal credit would remain intact should the business go into bankruptcy. This also works the other way around; an owner’s less than ideal credit rating will have no bearing on the credit of the business.
What kinds of businesses should file as a corporation?
Corporations are often chosen by business owners who require a formal business structure with flexible ownership options. C corporations allow the purchase of stock not only by individuals foreign or domestic, but also by other companies or legal entities.
This aspect of the corporation makes them an attractive choice for businesses that want to raise capital or gain the attention of potential investors.
Corporations also exist in perpetuity, as long as they are properly maintained and meet their obligations. So, unlike other entity types, the existence of the business is not tied directly to those who own the business.
What are the maintenance requirements of a corporation?
Corporations are required to comply with annual corporate formalities, including providing notice of annual meetings to the directors and shareholders, filing a Statement of Information with the Secretary of State, holding annual meetings, and documenting those meetings with corporate minutes.
Each state has its own set of requirements and deadlines to consider, and meeting those deadlines is a requirement in order to prevent your business from falling out of good standing. Businesses who fail to stay in good standing can file a reinstatement once their requirements have been met, but they are at risk of losing the liability protection provided by the corporation in the meantime.
Experto Tax Service can help you complete your annual requirements automatically if you opt to choose our business maintenance package.
What are the tax advantages of forming a corporation?
The potential tax benefits of filing a corporation, much like any other entity type, are based solely on the structure and financial details of the business itself. Corporations allow deductions for benefits like medical insurance and retirement plans for employees, but are also subject to “double taxation”, where income is taxed at both the corporate and personal level.
Losses are also fully deductible for a corporation, and a corporation’s profits can be left in the business for further expansion of the business. These benefits don’t always outweigh the potential negatives for a business, so it is a wise decision to consult an accountant about the best entity type relative to your business goals.
S Corporation Formation
Elect S Corporation tax status for your existing business.
After you form a corporation or LLC, you can choose to file your business taxes as an S corporation. An S corporation is a tax status election that retains the benefits provided by forming a corporation, while adding the additional tax benefits provided by a pass-through tax entity.
What is an S-Corporation Election?
An S-Corp Election is a tax-related filing. Many people think that an S-Corporation is a type of corporation, but really, an S-Corporation is a C-Corporation with an S-Corporation tax election. When the S-Corp tax election is made, the entity is telling the IRS that it would like to be taxed as a partnership rather than as a corporation. This is often done to avoid taxation at the corporate level and then again when distributions are made (at the individual level).
What are the benefits of filing as an S corporation?
At it’s core an S corporation is just like any other corporation, providing limited liability protection for it’s owners, a formal management structure, added credibility, and a strong foundation for outside investment. One of the unique features of an S corporation lies in the way it’s profits and losses are treated by the IRS, and depending on your business can offer tax saving advantages over a typical C corporation.
What kinds of businesses should file as an s corporation?
S corporations are ideal for small business owners who wish to take advantage of corporation perks, while avoiding double taxation. While an S corporation’s pass-through taxation is similar to an LLC or sole proprietorship, shareholders are not subject to self employment taxes which can equate to substantial tax savings depending on a number of factors. In most cases, corporations that would benefit from S Corporation status are those who plan on distributing the majority of earnings to its shareholders. Corporations who plan on retaining earnings for future investments in future tax years often choose the C Corporation because under the S Corporation, earnings will be taxed as if they were distributed to shareholders regardless of whether a distribution actually occurred or whether the corporation retained the earnings for future investment.
What are the requirements of filing an S corporation?
If you are considering s corporation tax status for your business, you should first be sure that your business meets the following requirements:
- You must be filed as a U.S corporation, foreign corporations cannot elect S corporation tax status.
- The business must maintain only one class of stock.
- An S corporation is limited to a maximum of 100 shareholders.
- Shareholders in the business must be individuals, estates, or trusts who consent in writing to the S corporation election. Other LLCs cannot be shareholders in an S corporation for example.
- All of the shareholders of the business must have a valid US Social Security Number. The corporate fiscal year must end on December 31st.
How are S corporations and C corporations different?
The difference between an s corporation and a c corporation is the way the profits and losses are taxed by the IRS. While a c corporation is subject to double taxation, that is taxation at both the corporate level and taxation on the distributions made to its shareholders, a corporation that chooses to file as an S corporation passes its profits and losses directly to the shareholders. This pass-through taxation is similar to the way an LLC is taxed, with the main difference being that while the owner of an LLC is often subject to self employment taxes, a shareholder is not. This can lead to potential tax benefits in many cases, but can also be a disadvantage depending on the needs of the business.
Form an LLC
Gain limited liability protection and added credibility.
Forming a limited liability company (LLC) provides liability protection for any type of business, and should be among the first steps you take as a new business owner. Starting an LLC can help you protect your personal assets while adding legitimacy to your company.
What is an LLC and why do I need one?
An LLC (limited liability company) is one of the most popular entity types chosen by new business owners and start-ups. It’s of the easiest entity types to set up and maintain with few annual requirements or ongoing filings.
One of the reasons that forming an LLC has become so popular among small business owners is because it limits your personal liability for the debts of the business, while still being very easy to operate and maintain.
What is Liability Protection?
Filing a limited liability company separates your personal assets from those of your business. This prevents you from being financially responsible for debts and liabilities of your business. Even though members are still liable, that liability is limited to the extent of their investments in the business. If, for instance, your company is involved in a lawsuit, the assets of the LLC itself could be in jeopardy, while the personal assets of the members/owners would be protected.
What kinds of businesses typically choose to file as a limited liability company?
Limited liability companies are easy to maintain while remaining extremely flexible, so it’s not surprising that it is a popular choice among businesses of all different shapes and sizes. Often, owners of an LLC are self employed or run smaller businesses, where the simplicity of pass through taxation and a lack of annual requirements makes a lot of sense.
Since the profits and losses are reported directly on the owners personal tax returns, filing taxes is much easier.
For businesses in industries like construction or real estate, where unforeseen circumstances and hazardous conditions may hold the owner responsible, consider starting an LLC. The protection gained means you will not be held personally liable, protecting you and your family from litigation or the debts of the business.
An LLC may not be the best choice for business owners who plan on raising capital through outside investment. LLCs are not public structures and do not have shareholders, so taking a company public is not an option either. However, in the event that you’d like to take your business public you may switch to a public legal structure, like a C corporation, later on.
What are the maintenance requirements of an LLC?
LLCs have fewer ongoing requirements compared to their corporation counterparts. For example, an LLC is not required to keep minutes or hold annual meetings. An LLC also does not have a board of directors, and isn’t is held to the same record keeping standards of a corporation. Keep in mind that the state of incorporation in will have its own set of annual requirements. That includes filing the required business licenses and permits, which vary from state to state.
Be sure to check in with your Secretary of State to ensure you don’t accidentally miss any required filings.
Are there tax advantages for LLCs?
Depending on how your business is structured, the amount of revenue your business earns, and several other factors, forming an LLC can provide potential tax benefits for business owners. LLCs are allowed to choose how they want to be taxed, either as an S corporation or C corporation. These options are not available when you are operating as a sole proprietorship.
LLCs don’t pay their own taxes directly, the income of the business its passed on to the members of the LLC through “pass through taxation.” This means that a member is subject to self-employment taxes, but at higher levels of income, the LLC can often pay a lower base tax rate than a C Corporation. The best way to determine your potential tax benefits is to consult an accountant.
Does an LLC have flexible ownership?
Even though many LLCs only have a single member (owner), the LLC structure itself allows for an unlimited amount of owners. This also gives the power to you, the owner of the business to determine its structure.
What is a Series LLC?
A series LLC is a form of limited liability company that provides liability protection to multiple “series”. Essentially, it’s a master LLC with separate divisions, each protected and operating independently. As an entity, the series LLC is geared towards businesses where investors own multiple companies, with each series being protected from the debts and obligations of the other series. Currently, only several states support this option, including Delaware, Illinois, Iowa, Nevada, Oklahoma, Puerto Rico, Tennessee, Texas, and Utah.