How to Choose the Right Business Entity
Forming a business or forming a company structure to protect your existing sole proprietorship involves crucial decisions that can determine the success of your business objectives and protect your personal assets. Choosing the proper form of business organization, whether you are a sole proprietor of an existing small business or looking for how to start a corporation or form a limited liability corporation, is an important decision in the formation process. For business owners, choosing to become members, shareholders, partners, directors, and officers, etc., and forming a corporation or other business entity offers the ability to minimize personal liabilities and gain tax and other advantages.
Whether to incorporate and which business form is best suited for your business organization will depend on the all the facts involved in your situation. A brief overview of different popular business entities used to form a business and their advantages & disadvantages is outlined below.
- Sole Proprietorship - As a sole proprietorship, the business owner has no protection against being personally liable for the debts of the business and income is taxed on the owner's individual tax return. The advantages of the corporate shield against personal liability is given up in exchange for not having to follow the legal filing and recordkeeping requirements involved in forming a corporation, limited liability corporation, etc. In forming the LLC vs. the sole proprietorship, for example, it involves creating an operating agreement among the members, or a buy-sell agreement. Therefore, a sole proprietor must examine what assets or joint marital property might be at risk that makes it worth considering the advantages of incorporating or whether to set up a LLC or corporation.
- Corporation - This type of business organization can take various forms, such as non-profit, publicly traded, closely held corporations, professional corporations, and more. A corporation is registered with the state as part of the set up process. One of the biggest advantages of incorporating is the protection it offers from subjecting the personal assets of the business owners to liability for paying corporate debts. Other advantages of the corporate structure and differences between closely held corporations and publicly traded companies is the ability of public corporations to issue stock to shareholders to raise capital. A publicly-traded company is subject to SEC regulation as well as other corporate law.
The document containing the governing rules for formation of the corporation and basic corporate operations, called the articles of incorporation or corporate charter, is typically required to be filed in the secretary of state's office. Directors and officers are named during formation of the corporation, who will pass bylaws that set guidelines and grant authority for operating the corporate form of business.
- S corporation - A Subchapter S corporation, also called an S corp, is a corporation in which the shareholders have elected to have their income treated like partnership income, and taxed to the owner's individual tax forms, rather than be taxed at the corporate tax rate. An S corp offers the limited liability protection of a corporation. To form a S corp, Subchapter S corporations can't have more than 75 shareholders, who all must be U.S. citizens or resident aliens and cannot be a corporation or partnership, and can issue only one class of stock.
- Non-profit - A non-profit corporation may be formed for charitable or benevolent purposes, such as a hospital or church. There are similar requirements in forming a for-profit and non-profit corporation, but there are different tax considerations and exemptions available to non-profits that meet IRS requirements.
- Limited Liability Corporation - Also referred to as an LLC or limited liability company. Basically, this legal form for your business gives you the advantage of shielding personal assets by incorporating as a business corporation, while allowing income to be taxed individually like a partnership. When comparing a corporation vs. LLC or LLC vs. S corp, there are fewer procedural requirements and formalities in an LLC company, so some choose to start a LLC. Another advantage of a LLC is the ability to issue more than one class of stock when you form an LLC, unlike when you form an S corporation.
- Partnership - A partnership is composed of partners who create a partnership agreement covering what the contribution and respective share of profits, or salary each partner will receive, and how the partners will manage and make decisions about the partnership. A buy-sell agreement is often created, allowing the partners to manage what will happen to the ownership and control of a partner who becomes incapacitated, dies, resigns, etc. in the future. A partnership doesn't offer the protection from personal liability that is one of the main advantages of the corporate form of business.
- Limited Partnership - This is a partnership that has two types of partners - general and limited partners. A limited partner provides financing but has little or no role in management of the company and has no personal liability for company affairs. A general partner is a partner who manages company operations and has unlimited personal liability for partnership debts.
When considering how to form a business, whether you choose to form a corporation, start an LLC, create a partnership, etc., US Legal Forms has the professionally drafted legal form your business needs. Whether you need small business forms or forms for a publicly-traded corporation, US Legal Forms offers business forms for use by sole proprietors, partners, members of an LLC, and more.
What are the advantages of the corporate form of business?
If you are looking to form a corporation, there can be many advantages of the corporate form of business. One of the main advantages of incorporating is the limited liability protection it offers under corporate law for shareholders. As a sole proprietorship, there is no limited liability protection and the assets of the sole proprietor and any personal or jointly held assets may be attached to pay business debts. There are other advantages, such as being able to raise capital through selling shares of stock and tax advantages of being taxed at the corporate rate and claiming deductions for business expenses. US Legal Forms offers incorporation packages and forms for forming a corporation, as well as thousands of other business forms and small business forms for all your company needs.
What is the advantage of an LLC vs. a corporation?
When trying to decide whether to start a corporation or start an LLC, one of the main advantages of a LLC is the relative lack of procedural formalities and filings applicable to a LLC. Also, unlike when you form a S corp, a limited liability company can issue more than one class of stock. An LLC also offers the ability to be taxed like a partnership and have income and loss reported on and taxed at the individual level. Each type of business organization, whether LLC or corporation, has its own advantages & disadvantages, so the decision on how to form a business should be based on the circumstances in each case.
Is forming a company difficult or expensive?
Forming a business like an S corporation, C corporation, or limited liability corporation can be completed easily and inexpensively by using an incorporation package for your state. US Legal Forms offers forms and form packages that let you form an LLC, form an S corp, limited partnership, or other form of business organization at low cost.
How is a business corporation formed?
Forming a corporation involves creating articles of incorporation, also called a certificate of incorporation or a corporate charter, and having it registered with the state, usually in the office of the secretary of state. The articles of incorporation set forth the basic corporate information and structure, names of directors and officers, the corporate purpose applicable to both for-profit and non-profit companies, and other matters, such as initial shares of stock to issue and the voting rights of shareholders.
In a closely held corporation, a buy-sell agreement is often created to deal with how a shareholder's stock will be handled if the shareholder leaves the company, dies, becomes incapacitated, etc. The filing requirements vary among closely held corporations and publicly traded corporations. In public corporations, where the stock is publicly traded, there are additional filing requirements to set up with the SEC, and there may be other local permit or other requirements depending on the type of business you are seeking to incorporate.
What is the difference in a LLC vs. limited partnership?
In a limited partnership, there are two types of partners, general and limited. Only a general partner can play a management role in a limited partnership. The main disadvantage of a limited partnership vs. LLC company is the unlimited personal liability of the general partner compared to the limited liability available to a managing member of a LLC. The management role of members in a limited liability corporation is determined by the operating agreement of the limited liability company created when the members form an LLC.
Should all sole proprietors form a corporation?
The corporate form of business makes sense for many who own a sole proprietorship. Many sole proprietors seek to form a corporation due to the limited liability protection it offers, in order to shield personal assets from liability for business debts. However, if there aren't any significant personal assets owned and the corporate tax rate isn't going to be lower than the individual rate, it may not be advantageous to incorporate.
What legal form is used to start a corporation or start a LLC?
US Legal Forms offers incorporation packages, as well as individual forms. The corporate existence is created by filing the articles of organization with the secretary of state. The incorporation package also includes other forms needed to form a corporation, such as bylaws, minutes, notices to shareholders, a form to elect S corp status, and more.