Three Types of Corporations
Picking a corporate structure means that you are picking a specific set of guidelines for taxing you from the profits of your business. Because of that, legalities require a business owner and his partners to know about the three structures of incorporation before they undertake that step.
Picking the type of corporation your business should take the form of a task that requires careful consideration.
You have to take time to make careful research and the efforts to understand what each corporation structure can have and what it can require for your business. This is especially true in filing taxes since each structure requires a taxing scheme that is different from others.
There are three types of structures that you can choose from when incorporating your business.
The C-corporation is the “classic company structure.” They are owned and operated by a number of shareholders based upon its authorized capital. Each corporation classified as “C” is treated as a separate entity, which means it has its own tax account separate from its owners. The owners would have to file a separate income tax based on what he/she earns individually from the corporation.
The “S” stands for small business. Among the three types of corporations, the S-corporation enjoys the most number of tax benefits. For example, the taxes that the business owner has to pay is calculated with the profits and losses incurred by his company. It is all part of his personal income tax, so he doesn’t have to pay double as an owner and as an earning employee. S-corporations also offer limited liability protection and reduced taxable gains if the owner sells the business.
Except for the tax benefits, an S-corporation is bound by the same requirements imposed on corporations like regular meetings. These businesses also suffer limitations of having only one class of stock to offer, which make it difficult to secure funding. S-corporations are also limited to 75 shareholders, a fact which compounds the difficulty in securing new capital.
Limited Liability Company
The LLC structure has enjoyed a distinction for being the rising star; more and more small businesses are choosing the LLC approach during the incorporation stage.
They could be best described as the hybrid between the S and the C corporations. It has all the tax benefits of an S corporation like the “pass through” scheme but with the structure of the C corporation. They also offer limited liability protection as to the actions of the corporate entity.
However, an LLC has all the restrictions bound on partnerships when it comes to transferring ownership interests to a party, making it difficult to sell or add new owners. Like a partnership, it also has a limited lifetime under purposes of tax law.