posted byBagasian LawMarch 24, 2021
There are many different types of corporations: C Corporation, S Corporation, LLC Corporation. If you are interested in incorporating your business it is important to understand the differences between these structures so that you can decide which will serve your business best.
Incorporating your business provides a number of advantages, both legally and financially, such as limited liability and having to abide by different tax laws.
If you have been considering incorporation your business, in this article, we will be discussing:
Incorporating your business means your business is no longer a sole proprietorship or general partnership and is categorized as its own business entity, separate from the creators or owners of the business.
This incorporated business becomes its own legal entity, providing a number of benefits.
First, incorporating your business allows you to protect your personal assets. This is because, through corporations, business owners have limited liability, meaning they are not liable for the debts and obligations of the corporation.
Second, corporations exist perpetually. In other words, even if they change ownership, the corporation continues to exist.
Third, corporations can deduct business expenses and are taxed differently.
For example, if a corporation owes a certain amount in losses, they can pay those losses immediately, while in a sole proprietorship they would have to pay those losses in smaller increments over an extended period of time.
When discussing how a corporation is taxed in comparison to a person that earns income, a person earning income pays taxes on those earnings while a corporation has the option to categorize their earnings as retained earnings.
For example, if a corporation is bringing in a large amount of profit, they can choose to retain some of their earnings to invest back into the company. Therefore, they do not have to pay taxes on these earnings.
A C Corporation is the most common type of corporate structure and describes an entity in which the corporation is taxed separately from its owners.
A C Corporation must pay corporate income tax, the tax that must be paid on the corporation’s revenue minus expenses. However, there are certain loopholes to lower corporate taxes, such as tax havens. Corporate taxes can also be lowered by deductions and government subsidies.
However, this presents some issues, since the business is taxed at both corporate and personal levels, as the assets of the owners and shareholders are viewed separately from the assets of the corporation as a whole.
The major benefit of a C Corporation is that it limits the liability of shareholders, owners, and employees of the business.
Additionally, A C Corporation can issue stock which allows for greater capital to improve the business and help fund future innovations.
An S corporation, or S subchapter, is a corporate structure that allows the corporation’s income to be directly distributed to shareholders.
The main difference between an S corporation and C corporation is that S corporations aim to avoid double taxation.
An S Corporation meets what is called “Internal Revenue Code” requirements, which allow the business to incorporate, even if it has less than 100 shareholders.
While an S Corporation gains all the benefits of corporations, it is taxed as a partnership, meaning the business does not have to pay federal income tax.
Since the partners are taxed based on the income they collect from the corporation, profit may directly be distributed to shareholders.
In other words, since S Corporations are not taxed as both corporations and as partnerships, double taxation is avoided.
An LLC, or limited liability company, is a type of business structure that limits the liability of owners and shareholders and is most often used for hedge funds and investment management businesses.
Having both the elements of a corporation and a sole proprietorship, an LLC is easier to set up than a corporation as it is best described as a formal partnership.
LLCs are different from corporations, such as C Corporations and S Corporations, because they are more flexible and provide greater protection.
Additionally, LLCs are not taxed like corporations, so they avoid double taxation.
An LLC is different from an S Corporation because an S-corp is not a business entity. Rather developing an S-corp or C-corp determines how the business is being taxed federally, while LLCs abide by state laws.
There are many legal implications to forming a corporation.
Therefore, hiring a professional attorney will ensure that your corporation is set up correctly. Some other ways a professional business attorney can help include:
Creating a corporation has numerous legal implications and requirements. It is essential to set up your corporation legally and understand the weight incorporating your business holds. A professional business attorney will guide you through the process and ensure it is done correctly.
From incorporating your business to understanding corporate tax laws, a lawyer will ensure the success and safety of your corporation.
Los Angeles-based lawyer, Alina Bagasian, will provide the best legal services for your business. Possessing an understanding of corporate and commercial business, Alina Bagasian is ready to represent your business and provide you with excellent legal advice.
The Law Offices of Alina Bagasian have achieved 100% client satisfaction, providing clients with unlimited advice, and offering eight different services to avoid any legal complications when incorporating your business.