How to Pick the Right Corporate Structure
The choice of the right corporate structure is one of the most crucial decisions a new business owner makes. The structure you choose concerns factors such as documentation, regulations, location, taxes, liabilities, administrative costs, marketing plans, and business goals. Choosing the right one can help your company thrive, while making the wrong choice can subject you to excessive restrictions and costs. Consider making this decision in consultation with experts such as attorneys, accountants, and counselors. Here are your options.
In a sole proprietorship, the owner retains complete control of the business by default. Your business and personal liabilities and assets remain interconnected, so you are personally responsible for obligations and debts your company incurs. Your finances are reported on a simple 1040 Schedule C tax form, and you are subject to a 15.3 percent self-employment tax on any reported income. A sole proprietorship is often the first corporate structure new business owners adopt before moving on to a more formal entity as their company grows.
Limited Liability Corporation (LLC)
The major advantage of an LLC is the protection of your personal assets and those of any partners from lawsuits or bankruptcies that affect your business. You can also formally document a partnership and create a brand and business name. However, your income is still subject to the self-employment tax, which covers Social Security and Medicare.
An S corporation has several advantages. It protects your personal assets from business liabilities and debts, your income is not subject to the self-employment tax, and you avoid the double taxation that C corporations are subject to. However, S corporations are restricted to only one class of stock and no more than 100 shareholders.
C corporation is the corporate structure of choice for most Fortune 500 companies because it offers the greatest personal protection for business owners. Owners and shareholders are often subject to double taxation, though, which is one of its biggest drawbacks. This is seldom a viable option for a small business owner.
For more advice on the right corporate structure for your business, contact Charis Commercial Capital.