Your 7 Minute Overview to Understanding Business Structures
Business structures are not as complicated as they may seem. When setting out to incorporate your company, consider researching each type of business structure. Understanding how each major structure benefits you, as well as burdens you, will ease the anxiety associated with choosing which one is best suited to your needs. In the article below, we discuss the subject of business structures in bite size pieces so you can digest the information before moving on with further research.
Incorporation Is Structured To Protect
When you incorporate a business, it becomes its own entity and has a life of its own. In essence, it is like a separate person from you. This means that you, as an individual, are protected from the liabilities that are inherent with running a business. It also becomes independent of shareholders and employees, safeguarding its management, staff and investors. The level of protection differs by structure type, but as long as you incorporate you can feel safe in your personal finances. This is different from a sole proprietorship or general partnership where the owner is the business.
Business Structures Vary By Purpose
Therefore, choosing a business structure can fall into a variety of categories regarding purpose. One is protection. Each structure, as described below, provides a different level of protection. The second purpose is to manage taxes as a separate entity, taking advantage of the many write-offs and exemptions available. As a separate entity, you also have the advantage of acquiring health benefits programs not available to individuals. For tax and growth purposes, an incorporated business can also hire people as employees rather than contractors, developing greater loyalty and longevity in their business practices. Furthermore, the interests held by one partner can easily be transferred to other partners should leaving the business be their decision. This differs from partnerships who must all fully agree on such changes to make them happen.
Choosing A Structure Depends On Needs
When you consider a business structure you should look at exactly what you are trying to accomplish. Is it to simplify taxes or to separate liabilities? If you want simplicity, you’d choose to remain a sole proprietor as incorporating brings in a host of other tax responsibilities that you must meet. If you desire to keep your personal finances safe from failures or accidents that a business may incur, then incorporating is a must. However, sometimes incorporation is about branding yourself too. It lends to credibility with investors, clients, and new hires when you have a legitimate business. This is because most people would rather deal with a serious business owner rather than a single person. However, if you are just a contractor, this could be debatable. Deciding to incorporate can make things more complex, but can also provide many benefits. You must weigh your needs when choosing your path
C Corporations Most Protective
Incorporating as a C Corporation means you are the most protected from liabilities. Creditors cannot attack your personal finances and, often, the company will choose to carry insurance to cover accidents and losses from a variety of situations. The major downfall of owning a C Corporation is adhering to the strict and often complex tax schedule. Corporations must file often monthly, quarterly and annually on state, federal, wage, and unemployment insurance taxes. Having employees complicates the matters even further as you will be required to withhold monies from taxes incurred when paying them. This means a dual approach to taxes, both corporate and employee, must be followed. In this case, a CPA can relieve a great amount of burden and make owning a corporation much more attractive. In addition to taxes, you’ll also have to file annual reports and have board meetings with a chosen Board of Directors. It is quite formal, but again most protective.
S Corporations Less Complex
S Corporations can boast the flexibility of an LLC while allowing transferability of ownership that LLCs cannot enact as a rule. They are less complex than C Corporations because they offer pass-through taxation where taxes are reported on personal income statements. This takes away the double taxation that a company incorporated as a C Corporation incurs. Incfile has a S Corporation tax calculator that will help you see the tax savings over both entities. This will help you decide if incorporating as an S Corporation is the right answer for your new venture.
LLCs Are A Good Compromise
Forming a Limited Liability Company, or LLC, is quite popular today because it protects your personal assets while still filing your profits with part of your personal tax reports. This means less paperwork and more time and money to devote to building your business. To receive complete protection of a C Corporation, but still operate as an LLC, you can file a Corporation status. This means you still are responsible for multiple tax structures, but you don’t have to manage a Board of Directors or run annual reports. A single owner can become an employee of their own LLC under a Corporate status and benefit from the efforts made to withhold taxes at the end of the year. It is an attractive option if you are a contractor looking for a more structured way to manage your business.
Regardless of which business structure you choose, incorporating your business is essential to true growth, credibility and protection. You’d be surprised at the resources available to you through the Small Business Administration, our blog, and our in-house experts. Give yourself the gift of incorporation, and start your company today.