Corporate Structure

Three Ways to Incorporate Your Business

The following three different ways to incorporate your business each have their own advantages and disadvantages. Always consult your accountant prior to forming any type of corporate structure. Always incorporate a Franchise Business to achieve the personal protection of limited personal liability. Signature Franchising suggests that all new Franchisors form a new and separate corporation to operate their Franchise from their present operating company.

L.L.C. Limited Liability Corporation

When looking at business types, many business owners choose to form a limited liability company (LLC). An LLC is a good way to "wall off" your personal assets from your company's liabilities, offering protection for your personal assets in the event of a judgment against your business. For this reason, it's a better fit for many owners than a sole proprietorship or a general partnership.

A limited liability company (LLC) also has certain tax advantages. The business itself is not responsible for taxes on its profits. Instead, the LLC's owners, known as "members," report their share of business profit and loss on their personal tax returns, similar to tax reporting for a general partnership. This is known as "pass-through" taxation.

The LLC Advantage

In short, the limited liability company business structure has many advantages, including:

  • Pass-through taxes. There's no need to file a corporate tax return. Owners report their share of profit and loss on their individual tax returns.
  • No residency requirement. Owners need not be U.S. citizens or permanent residents.
  • Legal protection. Owners have limited liability for business debts and obligations.
  • Enhanced credibility. Partners, suppliers and lenders may look more favorably on your business when you've formed an LLC.

Advantages of an LLC

  • no limit on the number of owners
  • profit and loss are passed through to the owners' individual tax returns
  • no annual meeting or minute book requirements

 Advantages of a Corporation

  • may issue shares of stock to attract investors
  • corporate income splitting may help lower overall tax liability

Disadvantages of an LLC

  • cannot engage in corporate income splitting to lower tax liability
  • cannot issue stock

Disadvantages of a Corporation

  • double taxation of corporate profits and shareholder dividends
  • must hold annual meetings and record minutes
  • S Corporations have restrictions on number of owners

S Corporation

A federal tax status with several advantages.

Corporations that meet certain requirements can elect an S Corporation status with the IRS. This federal tax status enables companies to "pass through" their taxable income or losses to owners/investors in the business, according to their ownership stake in the business.By default, companies that do not specify a tax status with the IRS are considered to be C Corporations - which means that they will be taxed as a C Corporation. On the other hand, by electing S Corporation status, a corporation can eliminate the disadvantage of "double taxation" of corporate income and shareholder dividends associated with the C Corporation tax status.

Say a corporation makes $300,000 in a given year - if it is an S Corporation, the business itself will not be taxed for that amount; instead, the company's shareholders will be required to pay taxes according to their share of the company. In this scenario, if the company has three shareholders, each with an equal share of company stock, each shareholder will pay taxes on $100,000.

If the C Corporation makes $300,000 in a year, then the company would pay taxes at the current corporate rate of 34%. If the remaining profits of $198,000 are distributed to the three shareholders as dividends, each shareholder will pay taxes on $66,000 in dividend income.

S Corporations, like other types of corporate entities, also keep owners' personal assets safe from company debt and judgments against the business.

In short, the S Corporation status offers the following advantages:

Limited liability: Company directors, officers, shareholders, and employees enjoy limited liability protectionPass-through taxation: Owners report their share of profit and loss on their individual tax returnsElimination of double taxation of income: Income is not taxed twice; once as corporate income and again as dividend incomeInvestment opportunities: The company can attract investors through the sale of shares of stockPerpetual existence: The business continues to exist even if the owner leaves or diesOnce-a-year tax filing requirement (vs. quarterly for

C Corporation

Protect your personal assets with this popular corporate structure.

The most common type of corporation in the U.S. is the C Corporation.By forming a C Corporation, business owners create a separate legal structure that helps shield their personal assets from judgments against the company. C Corporations have a specific structure that includes shareholders, directors, and officers.

The C Corporation is a time-tested business formation. It has many advantages, including:

Limited liability for directors, officers, shareholders, and employeesPerpetual existence, even if the owner leaves the companyEnhanced credibility among suppliers and lendersUnlimited growth potential through the sale of stockNo limit on the number of shareholders, although once the company has $10 million in assets and 500 shareholders, it is required to register with the SEC under the Securities Exchange Act of 1934Certain tax advantages, including tax-deductible business expenses

The C Corporation structure does have its drawbacks. For instance, a C Corporation's profits are taxed when earned and taxed again when distributed as shareholders' dividends, what's known as "double taxation." Shareholders in a C Corporation also can't deduct any corporate losses. To avoid these concerns, many small business owners choose to form an S Corporation instead.

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