Now that you have made the decision to become an entrepreneur,  usually the next decision is determing the kind of business you will have.  Should your business be a C-Corporation, S-Corporation, or a Limited Liability Company?  These options each come with there own tax and legal implications that should be taken into consideration.  

This blog will discuss a few of the tax and basic legal implications to be considered for each of the primary types of businesses to help you decide which structure best fits your situation.  For more in-depth legal advice regarding any of these entities, we suggest you speak with an attorney who specializes in small business.

C-Corporations

When you incorporate your business, you are creating an entity that is considered to be separate and apart from the owner (shareholders).  C-Corporations file their own tax returns and  pay taxes on net profit at the relevant corporate tax rates.  If you perform services for your corporation, you must be paid as an employee and any profits you take from the company will be taxable to you as dividend income, unless it represents a repayment of a loan you previously made to the business.    

Since the C-Corporation is considered to be a separate legal entity apart from its owners, if sued, only the assets owned by the company will be at stake, not the owner's personal assets.  This is one important reason why many start-ups choose this structure.

S-Corporations

What is an S-Corporation? An S-Corporation is a corporation whose income is taxed to the shareholders of the corporation instead of the corporation itself.  This structure allows its shareholders to make non-taxable withdrawals from the company (to a certain extent).  This is the opposite of the C-Corporation which considers similar withdrawals to be taxable as dividend income.   

An S-corp is limited to 100 shareholders total and certain types of entities are not allowed as owners.  From a legal aspect, this business type provides the same protection of your personal assets that the C-Corporation provides.   The tax rules for that of the C-Corp is substantially different from those of the S-Corp, so you should consult your CPA for help in determining potential tax savings when choosing this business structure.

Limited Liability Companies (LLC)

This business structure is taxed differently depending upon the number of members (owners) it has.  For instance, if the LLC only has one member, the IRS automatically taxes it as a sole proprietorship.  If there are two or more members, the IRS  will consider your LLC to be a partnership.  Members of LLCs can request the IRS to tax their business like that of a C-Corporation or an S-Corporation by filing the appropriate tax form or making the request when filing their initial tax return.  

The LLC is considered by many small businesses because of the flexibility it provides in how it is taxed, while also providing the asset protection similar to the protection granted under the corporation.  If you're planning to have investors finance your business, this structure can provide more options in how to structure legal agreements that the C-Corporation and S-Corporation cannot provide.

In the start-up phase of business, it is often more complicated to balance all the day to day tasks you're responsible for in addition to getting your business off the ground.  If determing what kind of business structure your start-up should have is not the only task you struggle with, click below for assistance in bringing your multi-faceted life back into alignment:

Check out other blog articles that may be of interest:

4 Reasons Why You May Owe Taxes

4 Steps to Gaining Financial Independence through Your Business