Entrepreneurs are likely aware of the fact that business incorporation is a good way to protect personal assets. It’s important to understand the nuances of different entities to ensure that the best model for a company is chosen.
Inc.com offers some tips on which entity might be the best fit for a business. The source says many small businesses choose to start as an LLC. LLC companies don’t require formal meetings, and they generally have minimal paperwork.
S corporations are another popular choice for entrepreneurs. Like LLCs, S corporations are "pass-through" entities, meaning businesses are not taxed; instead, profits and losses are filed on individual shareholders’ tax returns. This saves business owners from "double taxation" which sometimes occurs with companies.
C corporations, on the other hand, do get hit with double taxation. They are less common with small businesses. Generally, C corporations are used by larger companies. Still, Inc.com reminds entrepreneurs that C corporations can offer some very handy, unique benefits to small business.
The entity gives a business the chance to use a medical reimbursement plan, as medical expenses can be deducted while shareholders enjoy the benefit tax-free. Additionally, businesses that need substantial start up funds or expansion capital will likely find venture capitalists are more likely to invest in a C corporation.
This may be especially useful for young businesses as funds could be harder to come by in the near future. Legislation recently proposed by Senator Dodd might render a number of angel investors no longer credible.
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