If there will be multiple people involved in running the company, an S corp would be better than an LLC since there would be oversight via the board of directors. Also, members can be employees, and an S corp allows the members to receive cash dividends from company profits, which can be a great employee perk. If you're a sole proprietor, it might be best to establish an LLC since your business assets are separated from your personal assets.
You can always change the structure later or create a new company that's an S corporation. An S corporation would be better for more complex companies with many people involved since there needs to be a board of directors, a maximum of shareholders, and more regulatory requirements. LLCs are easier and less expensive to set up and simpler to maintain and remain compliant with the applicable business laws since there are less stringent operational regulations and reporting requirements. Nonetheless, the S corporation format is preferable if the business is seeking substantial outside financing or if it will eventually issue common stock.
It is, of course, possible to change the structure of a business if the nature of the business changes to require it, but doing so often might involve incurring a tax penalty of one kind or another. Therefore, it is best if the business owner can determine the most appropriate business entity choice when first establishing the business. In addition to the basic legal requirements for various types of business entities that are generally codified at the federal level, there are variations between state laws regarding incorporation.
Therefore, it is generally considered a good idea to consult with a corporate lawyer or accountant to make an informed decision regarding what type of business entity is best suited for your specific business. Internal Revenue Service. Chronicle of Small Business. Digital Media Law Project.
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Popular Courses. Business Essentials Guide to Mergers and Acquisitions. Business Business Essentials. Table of Contents Expand. LLC vs. S Corporation: An Overview.
S Corporations. Special Considerations. S Corp FAQs. The Bottom Line. S Corporation: An Overview Choosing the right business structure is crucial to the success of your business. Key Takeaways An LLC is a limited liability company, which is a type of legal entity that can be used when forming a business. Pros Personal liability protection No double taxation Easier to establish and operate than a corporation Flexible structure.
Cons More costly to establish than a sole proprietorship or partnership Must file an annual report, and the fee can cost hundreds of dollars Cannot attract outside investment other than banks. Pros Provides personal liability protection Doesn't pay taxes at the corporate level, allowing pass-through to a personal tax return Can boost credibility with suppliers, creditors, and investors Pays dividends to employees. Cons Some states may tax S corporations as corporations; not at the personal level.
S corporations can incur more fees than an LLC. S corporations have more regulations and guidelines that must be followed. Owner has less control. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
Another drawback to incorporation—one that often discourages small businesses from incorporating—is the fact that corporations are more costly to set up. When these earnings are distributed as dividends, the shareholders pay taxes on these dividends. Corporate profits are thus taxed twice—the corporation pays the taxes the first time and the shareholders pay the taxes the second time.
Rates vary by province. A lower tax rate is one of the key advantages to incorporating a business. Most accountants recommend business owners incorporate if they can afford to leave money in the company longer-term with the goal of watching the value of the assets grow.
The shares of most Canadian private corporations are eligible for a lifetime capital-gains exemption. If the business were a sole proprietorship, any gain from the sale of a private corporation would be taxed. Another advantage to incorporating is the opportunity to use income splitting among family members. If one spouse makes more money, you can income-split.
Over all, both spouses will be in a lower income-tax bracket. Another advantage of incorporation, beyond taxes, is the ability to shift liability to the corporation and away from the individual. Incorporating can also add credibility; some larger companies require contractors to be incorporated before they can be hired.
The disadvantages to incorporation are increased paperwork and administration. Owners also have to file two tax returns, a personal one and a more complicated one for the business. Not only did Ben and Jerry decide to switch from a partnership to a corporation, but they also decided to sell shares of stock to the public and thus become a public corporation.
Their sale of stock to the public was a bit unusual: Ben and Jerry wanted the community to own the company, so instead of offering the stock to anyone interested in buying a share, they offered stock to residents of Vermont only. The stock was so popular that one in every hundred Vermont families bought stock in the company. In addition to the three commonly adopted forms of business organization—sole proprietorship, partnership, and regular corporations—some business owners select other forms of organization to meet their particular needs.
How would you like a legal form of organization that provides the attractive features of the three common forms of organization corporation, sole proprietorship and partnership and avoids the unattractive features of these three organization forms? The limited liability company LLC accomplishes exactly that. In , Wyoming became the first state to allow businesses to operate as limited liability companies. Twenty years later, in , Hawaii became the last state to give its approval to the new organization form.
Since then, the limited liability company has increased in popularity. Its rapid growth was fueled in part by changes in state statutes that permit a limited liability company to have just one member. The trend to LLCs can be witnessed by reading company names on the side of trucks or on storefronts in your city.
But LLCs are not limited to small businesses. In a limited liability company, owners called members rather than shareholders are not personally liable for debts of the company, and its earnings are taxed only once, at the personal level thereby eliminating double taxation.
We have touted the benefits of limited liability protection for an LLC. We now need to point out some circumstances under which an LLC member or a shareholder in a corporation might be held personally liable for the debts of his or her company. A business owner can be held personally liable if he or she:.
A cooperative also known as a co-op is a business owned and controlled by those who use its services. Individuals and firms who belong to the cooperative join together to market products, purchase supplies, and provide services for its members. If run correctly, cooperatives increase profits for its producer-members and lower costs for its consumer-members.
Cooperatives are fairly common in the agricultural community. For example, some cranberry and grapefruit member growers market their cranberry sauce, fruit juices, and dried cranberries through the Ocean Spray Cooperative. A not-for-profit corporation sometimes called a nonprofit is an organization formed to serve some public purpose rather than for financial gain. Additionally, individuals and other organizations that contribute to the not-for-profit corporation can take a tax deduction for those contributions.
The types of groups that normally apply for nonprofit status vary widely and include churches, synagogues, mosques, and other places of worship; museums; universities; and conservation groups. Since Statistics Canada ended its deep collection of nonprofit statistics in , the most recent data available is:. Track how quickly you can match some of the more recent, larger mergers or major corporations. Want to know the other steps for starting a business?
Ready to apply for a loan from Pathway Lending? Here are five steps to apply today for your business loan! Follow us on Twitter - Click this link to visit our Twitter profile in a new tab. Click this link to visit our Youtube account in a new tab. Click this link to send us an email. But how do you decide which business legal structure is right for your company? Sole Proprietorship A type of business entity that is owned and run by one individual — there is no legal distinction between the owner and the business.
General Partnership An association between two or more people in business seeking a profit. The major difference among the two types of corporations is the tax treatment of the two entities: Taxation C-Corp : For federal income tax purposes, a C-Corp is recognized as a separate taxpaying entity, thus the entity files its own tax return Form Want more info on which business legal structure might work best for your business?
The information and reference materials contained here are intended solely for the general information of the reader. It is not intended to take the place of professional legal guidance. We make decisions based on your opportunity. Therefore, although one of the advantages of sole proprietorship is singular ownership and control, this can also be a disadvantage, as it makes it much more complicated to sell your business if you eventually decide you want to do so.
A sole proprietor is the sole owner of an unincorporated business. This means that there is no legal distinction between the owner and his or her business. A sole proprietor only needs an EIN if he or she is hiring employees. Lastly, you should contact your city or county to inform them that you are now operating as an LLC.
When it comes to the advantages and disadvantages of sole proprietorship, many of the best benefits can also be the top drawbacks, it all depends on what will work for your business. If you're trying to decide if sole proprietorship is right for you, here's what you have to consider:. Do you want to set up your business quickly and easily, with less paperwork and registration fees? Do you want to have everything related to your business attached to you, as an individual, and under your control?
Do you not want to worry about other partners, investors, or even government regulations having a hand in your business? If your answer to these questions is an overwhelming, "yes," then the advantages of sole proprietorship likely outweigh the disadvantages.
However, before you make a final decision, it's always worth considering what the other entity types have to offer — and even consulting with a lawyer or online legal service for professional advice. What are the advantages of a sole proprietorship? Less paperwork to get started.
Fewer registration fees. More straightforward banking. Simplified business ownership. Get the funding you need. Compare the details of multiple financing offers to get your business funded faster. Less paperwork. Easier tax setup. Fewer business fees.
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