Choosing the Right Business Entity Part II: Corporations and LLCs
Starting a business can be difficult; determining how to set up your business can be even more difficult. When planning to start a business, it is important to keep in mind if you’d like to enter into a venture with another person or if you’d like to start solo. The two most basic types of business, sole proprietorships, and partnerships were discussed in Part I of this article. In this part, we will discuss a type of business that you can start as an individual or with multiple owners and/or investors, namely corporations and Limited Liability Companies.
A corporation is a unique type of business structure. It can be defined as a company or group of people authorized to act as a single entity and recognized as such in law. Benefits and defining characteristics of a corporation include:
- Limited Liability;
- Separation of business and personal finances;
- Permitted in all 50 states;
- Preferred by outside investors;
- Preferred for Initial Public Offerings (IPOs); and
- Recognizability outside of the United States, among others.
While there are plenty of advantages to owning a corporation, there are a few disadvantages, including:
- Double taxation;
- High start-up cost; and
- Increase government regulation, among others.
While all corporations retain the benefits outlined above, there are several types of corporations, including C Corporations and S Corporations. Prior to starting your business venture as a corporation, it is important to determine what type of corporation you will be forming.
C Corporation v S Corporation:
The term “C Corporation” is a business term that is used to distinguish this type of entity from others, as its profits are taxed separately from its owners under subchapter C of the Internal Revenue Code. Here, owners and shareholders are taxed separately from the entity. A “C Corporation” is typically referred to as a corporation, as it is one of the most commonly used business structures for large and publicly held companies.
According to the Internal Revenue Service (IRS), S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This type of corporation is taxed under Subchapter S of the Internal Revenue Code.
In general, all corporations share the previously mentioned benefits and disadvantages. However, there are a few differences between a C corporation and an S corporation. The chart below outlines the differences:
| C Corporations
· Owners pay personal income tax on profits. · Business must pay corporate income tax. |
S Corporations
· Owners pay personal income tax on profits. · All business income/loss is passed through to the owners each year. · Maximum of 100 shareholders per entity. · Shareholders must be U.S. Citizens. |
Limited Liability Companies and Professional Limited Liability Companies
The last type of business structure that will be discussed in this article is a Limited Liability Company. This corporate form can be broken down into two separate categories: Limited Liability Companies (LLC) and Professional Limited Liability Companies (PLLC). An LLC is defined as a company that combines elements of a partnership, sole proprietorship, and a corporation. In this type of business structure, the owners, or members, are not personally liable for the LLC’s losses and lawsuits. A PLLC is a unique type of LLC and is very similar to a regular LLC. However, the main difference is that a PLLC can only be registered by a licensed professional who will be offering services directly related to their specific profession.
Both structures share a number of similarities, including:
- Limited Liability;
- Separation of business and personal finances;
- Permitted in all 50 states;
- Highly flexible management structure; and
- Flexible tax reporting options, among others.
Either an LLC or a PLLC, depending on what industry you’re in, can be a great option if your business faces an increased risk of loss or lawsuit. With this, you as the owner will be personally protected if your business starts to go south. However, like corporations, there are a few disadvantages to forming an LLC, including:
- Increased start-up costs;
- Increased taxes;
- The difficulty of depositing checks (they cannot be cashed, they must be deposited into a corporate account); and
- Keeping separate records, among others.
Regardless of what type of business you are looking to create, it is important to choose the best corporate structure for your business considering the industry you are in, along with your individual circumstances. Before you start your business, it is important to consult an experienced New York business law attorney. From determining what type of business is right for you, to the initial startup of your business, to any issues you may encounter along the way, you can rely on Hobson-Williams, P.C. for effective and diligent representation in all your business’ legal matters. The attorneys at Hobson-Williams, P.C. are skilled and knowledgeable in the area of business law and commercial transactions. Contact us at (718) 210-4744 for the quality representation that you deserve.
