Hey there, Mr. or Ms. Entrepreneur! I heard that you’re ready to start your own business. You’ve got a great business plan and a cool new name. But wait! Before you start hiring people or sign that commercial lease, it’s important to first protect yourself by setting up a company for your business to limit your personal liability. For example, if there’s a law suit related to the business, it should be against the company, and not with you individually.
So what flavor company suits your tastes? Well I’m glad you asked! On our menu of corporate entities, we have 3 decadent choices: “C Corporations,” “S Corporations,” and of course, a favorite among lawyers, “Limited Liability Companies” (aka LLCs). Each organizational form has its advantages and disadvantages, and owners should consider how these differences apply to their specific situation.
Before choosing an entity, ask yourself these two questions:
- How high of a priority is reducing my taxes?
C corporations are subject to what is called “double-taxation.” Essentially, a corporation pays taxes on all of its profits that are not considered business expenses. Further, if the corporation decides to distribute dividends to its shareholders, the shareholders are required to pay taxes on those dividends. In the end, the same income is being taxed twice, which may be unattractive to some business owners.
S corporations and LLCs, on the other hand, are “flow-through entities.” In flow-through entities, money flows through the entity (fancy that!) to the owners, who are taxed (but the entity is not), avoiding double-taxation.
- How much capital do I need to sufficiently fund my business, and what kind of investors or owners will there be?
Of all the entities, C corporations grant the most flexibility in raising funds. C corporations can raise capital by issuing a potentially unlimited amount of shares to unlimited number of investors. That’s because C corps have a super power – they can go public. If you’re planning on growing your company to the point that its shares would be publicly traded on the stock exchange, then step right up – a C corporation is for you.
Like C corporations, S corporations can issue stock to raise capital, but with restrictions. That’s because the “S” in S corp is for “Small Business”. That means that an S corp can only have up to 100 shareholders and those shareholders must be US citizens or permanent residents. Sorry foreigners and other companies, but you can’t join the S club.
LLCs are more flexible than S corps. But you can’t go public with an LLC. If you’re looking to: 1. raise money, 2. have foreign investors, and 3. want other corporations or LLCs as shareholders, but want to keep your company privately owned, then Ladies Love Cool Companies, give it up to the friendly LLC!
Remember to check in with your Legal crew and rockin’ accountants to make sure you’re structuring your business right.
This Blog is made available by Romano Law PLLC for general informational and educational purposes only, not to provide specific legal advice. By using this Blog you understand that there is no attorney client relationship between you and Romano Law PLLC or any individual contributor. You should consult a licensed professional attorney for individual advice regarding your own situation.