Incorporating is a major decision for any business – from start-ups to long-held companies. That’s why setting up a legal and tax structure that supports your efforts and gives you all the necessary legal protections you need is such an important step. But if you want to do the best job in incorporating your business, you’re going to have to know what type of corporation your business will become.
That’s right – there are indeed different types of corporations for you to choose from. And if you want to make the best decision about which type your company will become, you’re going to have to be informed about the different types of corporations. Let’s get you started by taking a quick look at three different types of corporations, and which might be the best solution for you and your business.
LLC – Limited Liability Companies
One of the most popular corporate structures in the United States, the LLC or Limited Liability Company, is a favorite among smaller organizations like law firms. As the term “limited liability” would suggest, forming such a company means that the owner of this type of company has limited liability which means their assets are more strongly protected from lawsuits. There is also a high degree of flexibility associated with the LLC because all sorts of people and legal entities can own shares in these companies – for example, a corporation may own a share of an LLC, as might an individual.
S corporations are a fairly standard type of corporation that avoids double taxation by allowing the income and losses of a corporation to pass directly to shareholders, meaning that the income generated through these shares are taxed as personal income. By avoiding a hidden “double tax” for its shareholders, the S corporation is seen as a very ideal model of corporation that keeps the tax structure simple. This has advantages for corporations with a lot of owners or shareholders, which is why many large corporations will embrace the S-Corporation structure.
A corporation that is taxed separately from its owners, the C corporation is similar to the S corporation but for that one highly-distinguishing fact. Many large corporations (such as “name brands” that you’ve heard of before) are C corporations. These corporations pay taxes as entities in and of themselves, but there are other freedoms that these corporations enjoy such as not having to file financial statements. Distributing assets or money from a C corporation is also simple, and is simply treated as a dividend for tax purposes. Because of this high degree of ownership, C corporations have a lot of business flexibility and considerable financial power.
Making Sense of It All
What type of corporation will your company become? Depending on your goals, you may find it advantageous to pick a certain one. Large corporations will typically not deviate from the C corporation structure, just as smaller organizations will typically not deviate from the flexibility of an LLC.