Deciding Which Type Of Corporation Is Right For You
August 10, 2011 by MikeStein
Operating your own small business can be exciting and sometimes confusing. There are many decisions to be made in the beginning stages, including which corporate structure to operate your business from. Whether you are just starting out with your own company or have partners you plan to work with, there are several factors you want to consider.
If you are currently operating your business as a sole proprietor or as a general partnership, you are completely exposing yourself to lawsuits and may be missing out on several tax deductions. If you have made the decision to incorporate your business, you can limit your personal liability to lawsuits and in many cases, gain considerable tax advantages.
What type of corporation is best for your company?
All Corporations are formed at the State level and are considered separate entities from their shareholders and officers. As separate entities they are able to shield their shareholders and officers from judgments against the corporation.
What are your options when it comes to taxation of the Corporation?
Corporations may choose how its profits will be taxed. If your goal is to take advantage of all the pre-tax expenses allowed by the IRS through employee benefit packages, etc, the Corporation will pay its officers and employees a wage and any remaining profits will be taxed at the corporate level (commonly called a “C” corporation). After the profits have been taxed and if the Board of Directors decide to issue a dividend to the shareholders, that dividend will be reported on the shareholder’s tax return as income. This is an example of “double taxation”.
Shareholders may choose “Subchapter S” with the IRS for their Corporation as a way to avoid double taxation. Simply put, the taxation on the corporation’s profits are not taxed at the corporate level but are “passed through” to the individual shareholders per their percentage of ownership and reflected on the shareholder’s personal tax return. The downside to the “S” Corporation is they are not allowed as many pre-tax deductions when the employee/officer is also a shareholder. Also, there are restrictions on who may be a shareholder and how many may own the stock of the “S” Corporation.
There are key differences between the two types of taxation the Corporation may elect. If you aren’t sure how to proceed or are unclear about which structure is best for you, please give me a call and I’ll help you decide the best plan of attack for your particular company.
At Laughlin Associates we provide a customized 1-on-1 approach to help you set up your business with the proper corporate structure. It is important to Laughlin Associates that we provide you with personalized service through every step of the process. If you have questions about choosing the right entity for your business drop me a line at email@example.com or 1-800-648-0966 and ask for me, Mike Stein.