Which corporate structure to adopt is one of the first decisions a new business finds it necessary to make. The answer depends upon the amount of earnings the company makes and the number of people involved as well as the location, taxation, and long-term goals of the business. Here are the primary options to take into consideration when selecting the most advantageous corporate structure for your company.
Sole Proprietorship
You can set up a sole proprietorship when you’re working alone in an unincorporated business. There is no need to file for an employer identification number, or EIN. You can simply report your business income and expenses on your Form 1040 using a Schedule C. However, because you have no separate corporate entity, you risk personal responsibility for any liabilities that may arise through your business. Additionally, a sole proprietorship has to pay 15.3 percent self-employment tax on net business income.
Limited Liability Corporation
A business consisting of a single individual or a group of owners can set up a corporate structure known as a Limited Liability Corporation, or LLC. One of the primary benefits of an LLC is its ability to protect the personal assets of the owners from liabilities. It’s also easy to set up, and allows you to create and reserve a unique business name and brand. The members still have to pay the full 15.3 percent self-employment tax on their net income.
S Corporation
If you set up an S Corporation, you can have no more than one type of stock and 100 investors. One important advantage of this type of corporate structure is that it protects its owners and shareholders from liabilities such as corporate debt. Because S Corporation owners can get salaries, they only pay self-employment taxes on their portion of the payroll and not on the entire business net income.
C Corporation
C Corporations are large companies that usually have numerous stock options. They are also not limited in the number of investors they can take on. However, small businesses seldom choose this option. Although members of C Corporations are allowed a number of tax write-offs, they are also subject to double corporate taxation.
For more advice on corporate structure, contact AMZA Capital.
