Small Business Incorporation Best Tips
When incorporating a business, an owner would have to answer the question of what business structure to adopt. That decision is crucial as it would determine how the company would conduct its business in the future.
Our guide discusses both the advantage and disadvantage of the different structures to help you choose the best one for your business.
Corporation v. Proprietorship, Partnership and LLC
One of the crucial decisions people make when starting a company is choosing the legal structure for the business. There are four types to choose from: proprietorship, partnership, corporation and limited liability. Each as its own advantages and disadvantages and business owners must consider these factors very well as their decision would largely determine how the business should pay taxes and how the owners should assume liabilities in the future. For a detailed comparison, visit The Small Business Administration Web site.
But the main disadvantage of these is: the law treats the business and its owners as one. This means the business owner could be liable for the financial and legal responsibilities of the business. This is where corporations stand out. In a corporation, the business and the business owners are held separate entities. Thus, a business owner can protect his personal assets from potential liabilities of his company. An LLC has the limited liability feature of the corporation, as well as the flexibility of a general partnership. But an LLC has a fixed duration, whereas the corporation has not, although members of an LLC may opt to extend the life of the business upon its expiration.
C Corporation v. S Corporation
A regular C corporation is generally advisable for larger startups due to the ease with which stocks or ownership of the company is transferred from one party to another. But it is prone to being taxed twice – for profit and for dividends paid to shareholders because under a C structure, these dividends are not deductible from business income. This double tax could be remedied by electing to incorporate under subchapter S. Under the S structure, profits from the business can be recorded in the owners’ tax returns. This is extremely helpful when the business operates at a loss. The loss could be used to offset income earned by the owners from other sources. Tax Information for corporation are available at the IRS Web site.
S Corporation v. LLC
An advantage of an LLC is that, it can take in as many shareholders as it wants both corporations and partnerships, as opposed to the requirement under an S corporation where all should be individuals. An LLC is sort of a hybrid between a corporation and a partnership, and is limited to only two of four characteristics that define corporations. It could not have the limited liability, the limitless life, the freedom to transfer ownership, and the centralized management that corporations enjoy all together.
Money Saving Tips on Incorporating
A corporation is subject to a more stringent watch by federal, state and local regulators, thus, incorporating one requires more paperwork, time and money than the other structures. How to beat these downsides?
Do everything correctly the first time. Choose a company name that you will use from then on. Changing it sometime later would require you to amend articles of incorporation, domain names, phone listings, and business documents -- all of which would cost both energy and money.
While everybody has the option of incorporating where the tax laws are better and incorporation laws are flexible, if you are a small business, it is advisable to incorporate where you will do all or majority of your business. Incorporating in another state will cost additional fees and require more paperwork. For one, you have to declare yourself as a foreign corporation in your home state. To see required state licenses for incorporating a business, visit USA.gov.
Be aware of the steps that could potentially cost you more money. Business law firms have a flat rate for the basics of incorporating a business. But you have to pay more for having additional shareholders and for asking attorneys to draft more complicated shareholder agreements. Find help in incorporating a business from lawyers at Attorneys Corporate Service and Legal Fish. You can also incorporate a business online, visit BizFilings or My Corporation.