By: Jessica Bower
on Sunday, November 22, 2009
Anyone who operates a business either alone or in a group with others can choose to incorporate. This is also the case for individuals or groups involved in religious, civil or non-profit organizations. It’s no secret that incorporating your business allots several benefits. However, it’s important to understand the various business services and incorporation options available as well as whom it is for appropriate for.
Business Incorporation Types
Get ready to take some notes if you are thinking of incorporating your business:
This type of business incorporation is considered the most common corporate structure. A general corporation involves a separate legal entity that is owned by stockholders. There are several advantages and a few disadvantages of a general corporation:
- Owner’s personal assets are protected against business liability and debt
- Tax benefits on things like insurance, travel, and retirement plan deductions
- Management remains unaffected by change of ownership
- More stringent state and federal rules and regulations
- More costly to form than other types of business incorporations
C Corps are generally most ideal for large-scale businesses, as they are the most complex to operate. Running a C Corporation involves duties such as holding annual stockholder and Board of Directors meetings and keeping track of corporate minutes. C Corps are also the most expensive corporate structure to operate. Depending on the state you live in, you may also have to pay additional taxes. On the other hand, there are also many advantages to this type of business incorporation system, including full deductions for health and disability insurance and medical expenses. Stock options are also available with a C Corp, as well as benefits pertaining to life insurance, pension plans and dinner allowances.
Incorporating your business into an S Corporation is somewhat similar to C Corps, but without the possibility of dealing with double taxation issues. In terms of rules and regulations, you are limited to fewer than 75 stockholders for an S Corp and the stocks must be United States owned. Furthermore, it must be a domestic corporation and only offer once class of stock. Similar to C Corporations, you are required to keep corporate minutes and you must hold annual stockholder and Board of Directors meetings. S Corps however, offer a unique self-employment tax benefit that can save you up to 50% on Medicare and SS taxes.
Limited Liability Company or LLC’s were first introduced in the U.S. in 1977 and authorized for pass through taxation by the IRS in 1988. With an LLC, owners are able to have the corporate liability protection for their personal assets from business debt as well as tax breaks. An LLC is basically similar to an S corporation minus the IRS restrictions. However, LLC’s tend to have a limited life, usually around 30 years in many states. Some states may also require at least two members to form an LLC. Additionally, because LLC’s are not corporations, they do not have stock or the benefits that go along with stock ownership and sales.
A sole proprietorship is basically a business that has only one owner. It is known as a sole proprietor, which means that the owner has no partners. It’s not a corporation per say, therefore it does not pay corporate taxes. However, operating as a sole proprietor does mean paying personal income taxes on the profits earned. The two main tax advantages of a sole proprietorship include avoiding double taxation and the ability to deduct your business losses to the extent of your total income (including interest, dividends and profits). Unfortunately, one of the drawbacks includes difficulty in raising your own capital, as shares of business cannot be sold. You are also held personally responsible for all the debts of the business and may have to pay high income taxes.