When you own a business it's up to you to decide if it’s a good idea for you to incorporate your business. One big advantage of incorporating is that it limits your legal liability. Meaning that your responsibility for liabilities and debts that are incurred by a corporation is usually limited to the assets of your business. Though there are some exceptions, your personal assets are not usually at risk. There is a cost to incorporate, in some cases, its tax consequences.
Depending on the type and size of your business, you may not need to incorporate because liability may not be an issue for your business or it can be covered by insurance. There are numerous companies that operate as an unincorporated sole proprietor.
If you make the decision to incorporate your business, you will have to decide what corporate forms to use. Here are your options:
* C corporations. This is the traditional form of corporations. It has the most flexibility in structuring ownership and benefits. It is the form in which most large businesses operate. The main disadvantage is double taxation. The corporation first pays tax on its profits and then these profits are taxed once again when they are paid as dividends to individual shareholders.
* S corporations and LLCs. These are called “pass-through” entities. This is because both of these entities have no taxation at the corporation level. Rather, profits and losses are passed through to the shareholders and reported on their individual income tax returns.
There are some ownership limitations for S corporations.
* There cannot be more that 100 shareholders that are U.S. citizens or U.S. residents according to tax law.
* There can only be one class of stock.
* State registered LLCs are a popular choice for many businesses. This is because they offer more flexible ownership rules than an S corporation and have certain tax advantages.
Choosing the right business entity is important whether you are an established business or a new business. In fact, established businesses have been known to change from one form to another during the lifetime of the business.
If you need assistance selecting the selecting an entity contact our office at (866) 497-9761 to schedule an appointment with our advisors.