Getting Your Corporate Structure Just Right
There can be many things to consider when starting a business. One of the most important decisions that business owners may face can be its corporate structure. Factors such as costs, the existence of partners and liabilities can affect the way a business owner chooses to structure his company. Here are some common business structures that owners may adopt.
Limited Liability Corporation
A limited liability Corporation may be referred to as an LLC. This type of structure can be of benefit to business owners with partners by providing specific liability protection against the actions of each partner. Likewise, even if the business owner does not have a partner, an LLC can protect the business owner from personal liability if injuries or losses occur to others because of the business, or if the business incurs debt that cannot be repaid. It can also benefit business owners wishing to brand their businesses.
In a Sole proprietorship, the business may not be required to meet certain business requirements. The owner may not be required to register the business, establish a business bank account or obtain a tax ID number. At a glance, a sole proprietorship may appear to be the least complicated corporate structure, but it can have disadvantages.
Owners of sole proprietorships can be held personally responsible for any business liabilities or debts. This could be catastrophic if the business was sued for a large amount of money for which the business owner had to be personally responsible.
C corporations may be more common among very large established businesses. Under this structure, there can be an unlimited number of shareholders who may not be responsible for daily operations of the company but can be involved in decisions affecting the business. The shareholders may be protected from personal liability in the same manner as a LLC. The profits from a C corporation can be taxed at the corporate level and at the individual level for shareholders who receive dividends, which could result in double taxation for some businesses.
Like a C corporation and LLC, shareholders in S corporations may be protected from personal liability. S corporations may be more attractive to small business owners and those who are just starting out their businesses. Unlike C corporations, the profits in this corporate structure may not be taxed at the corporate level, but instead, may be claimed on shareholders’ personal income tax returns based on the wages paid to them from the business.