Businesses come in all shapes, sizes, and forms – and it is important to consider all of the factors, when deciding on the right business formation for you.
Ultimately, this will dictate the future of your business and all of its tax, legal, and operational entities for years, so the stakes are high. Because of that, it is imperative to seek professional legal help to weigh out the best options.
Consider the Startup Costs
Business formations range in a variety of startup costs, from a more inexpensive sole proprietorship or general partnerships to a higher-priced limited liability company (LLC) and corporation. It costs more for an LLC because of the protection it provides for a potential lawsuit against the business and any personal assets.
In this financial realm, it is also critical to keep in mind the amount of capital you plan to raise, which will affect if you decide on these business formations:
C Corporations
This formation offers the most flexibility, but comes with strict rules, such as:
- The owners’ or shareholders’ assets are separated from the income of the corporation.
- The liability of the investors and firm owners is limited
- They suffer from double-taxation, which is getting taxed on the company’s revenue and any personal income you bring in from the company.
- This formation is mandated to hold annual meetings and have a board of directors.
S Corporations
An S Corporation, also known as an S corp or S subchapter, has a few similarities to a C Corporation, but some ways it differs are:
- There are 100 or less shareholders, who are required to individuals, specific trusts and estates or particular tax-exempt organization.
- They do not pay corporate taxes, but owners do pay self-employment taxes for the amount of salary they take in from the company.
- There is limited liability protection for their owners/principals.
LLCs
LLCs are more flexible than C or S Corporations, serving as a hybrid sort of legal formation with characteristics of a corporation, partnership, or sole proprietorship. For example, LLCs are not subject to the same Internal Revenue Service (IRS) rules, or pass-through taxation, in place that oversees the number and type of members, made up mostly of sole proprietors or small groups of professionals.
What is an Ease of Formation?
It is a good idea to ask yourself, “What is the ease of formation for this business model?”
A sole proprietorship is the simplest to set up, with the only step required usually just opening a business checking account and registering the business. A partnership also tends to be easy, but has that added step of signing an agreement between the partners. A limited partnership, LLC and corporation formations involve more work, per state requirements. An LLC also has a set of recordkeeping rules.
How to Choose A Business Formation
Navigating through the complex process of choosing a business formation on your own could cost you in the end. Hire a professional business attorney to guide you through all the factors that are in motion before you decide on the best one for you.