What type of corporation should i start

As an individual starting their own business, it's important to understand all of the nuances involved and choose the right structure for your company.

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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways The creation of a limited liability company LLC is a much simpler process than creating a corporation and usually requires less paperwork. LLCs are created under state law, so the process of forming one depends on the state in which it is being filed. Once an LLC is formed, it is good practice to set out the roles and responsibilities of the members by creating an operating agreement to define these roles.

Whereas all income in an LLC flows through to the members, an S corporation is allowed to pass income and losses to its shareholders.

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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Business Essentials LLC vs. S Corporation: What's the Difference? Partner Links. Related Terms Form S: U. Income Tax Return for an S Corporation is used to report the income, losses, and dividends of S corporation shareholders.

Business Income Business income is a type of earned income and is classified as ordinary income for tax purposes. How it is reported depends on the type of business. These owners receive payments from the business in the form of taxable dividends. Some owners might also be executives or employees, and they're paid as employees for the duties they perform in addition to receiving shareholder dividends. Pass-through businesses are named as such because the tax liability of the business is passed through to the owner as part of the owner's personal tax return.

Sole proprietorships, partnerships, limited liability companies LLCs , and S corporations a special kind of corporation are considered pass-through entities. Some business owners—sole proprietors, and LLC owners, and partners in partnerships—are considered self-employed not employees , and they must pay self-employment tax Social Security and Medicare taxes on the net income from their business.

S corporation owners are not considered as being self-employed. You should include self-employment taxes when you look at your tax situation for one of these business types. Corporations, partnerships, and limited liability companies LLCs must register with a specific state where they plan to do business.

Requirements and rules for business structures are set by the states through each state's business division or corporations office. All states allow corporations, partnerships, and LLC's, but some variations on these basic business types might or might not be available in all states.

Check with your secretary of state's office, usually the business division, to get more information on their registration process.

A sole proprietorship is a type of business operated by one individual. The business is not considered a separate legal entity from its owner and it doesn't have to register with a state. This feature has pros and cons. On the pro side, the sole proprietor has full ownership rights in decision-making and doesn't have to answer to a board of directors or other owners. It also means the owner receives all the profits of the business.

Taxes are fairly simple, consisting of a Schedule C form included in the owner's personal tax return. On the con side, it means the owner must take all of the losses of the business. It also means that the owner may be personally liable for the debt of the business, in bankruptcy, for lawsuits against the business, and for general liability purposes. Sole proprietorships might be a good choice or starting a new business in a low-risk situation before forming a more formal business.

An incorporated business is separate from its owners for operations, taxes, and liability purposes. The corporation is formed with articles of incorporation under the laws of the state in which it operates. Corporations are costly to form because, in addition to the state registration, they must have a board of directors, keep regular meeting minutes and other corporate records, and report to shareholders.

The corporation pays its own taxes and the owners pay taxes on dividends as shareholders, which in some cases may be double taxation. Two benefits to incorporating are the generally low corporate tax rates and the ease of raising funds from investors. Two types of corporations are designed specifically for professionals in practice with other professionals.

A professional corporation is a specific type of corporation for licensed professionals such as attorneys, doctors, architects, or accountants. These professionals can form a corporation in some states with the liability protection of a corporation. But in this business type, each professional is still liable for their own wrongful professional actions.

A personal service corporation PSC , meanwhile, is limited to providing personal services. To qualify for this status, the PSC must meet certain IRS requirements including shares of stock owned and amount of services performed by owner-employees. A wide range of professional fields can qualify as a PSC. A subchapter S corporation or S corp is a corporation which has the limited liability benefits of a corporation but is taxed as a pass-through business, like a partnership.

The S corporation owners aren't double-taxed on their income, but there are several restrictions on electing S corporation status, including a limit of shareholders and only one class of stock. Taxes are fairly complex for S corporations because they must file a federal tax return return, have separate schedules for the tax due from owners, and some states also tax S corporations. Like corporations, though, S corporations must have a board of directors and follow all the filing and operating procedures of a corporation.

So, that personal trainer and nutritionist pairing? A perfect partnership, as they both bring something to the table and are equal participants in the business.

So too would be a pair of entrepreneurs launching an online consulting business, two master brewers starting a local brewery, and so on—you get the idea. General partnership: A general partnership assumes that all parties are equally involved; that is to say, all profits, liabilities, and duties within the company are distributed evenly. If there is an intentionally unequal split in the partnership for instance, if one partner opts to accept a greater portion of work in exchange for a greater profit share , this must be noted on the official partnership agreement.

Limited partnership: A limited partnership also known as a partnership with limited liability is often used for partners who serve an investor role only, and have limited input into the actual running of the company. Joint venture: If you plan on partnering up for one specific project, a joint venture might for you. Joint ventures function the same as a general partnership, but for a confined span of time, such as the completion of a one-time project. Similar to a sole proprietorship, simply doing business together effectively forms your partnership.

You may also need to apply for certain licenses and permits , depending on your business and your state. Here are a few things to keep in mind before launching your partnership. Should your business fall on hard times, does the idea of being held personally responsible for all losses sound intimidating? A limited liability corporation or LLC is, in some ways, the best of both worlds.

It allows for the flexibility of a partnership or sole proprietorship, but, as the name suggests, limits the liability of those involved, similar to a corporation. An LLC is usually a lot like an S corporation, and offers a combination of some limitation on legal liability and some favorable tax treatment for profits and transfer of assets. This is a newer form of legal entity, and be aware that LLCs vary a lot state to state, so the advisability and benefits of forming one will also vary.

If the idea of taking on complete personal liability for your business makes you hesitant to start one, you might want to consider a limited liability corporation. If you have substantial personal assets that you wish to protect and not involve in your business, an LLC might be right for you.

Check out our articles on forming an LLC at the end of this section for more information. When most people think of a business structure, a corporation is likely what jumps to mind first. Shareholders, a more complex legal structure, and more intricate tax requirements are all characteristics of a corporation.

Corporations are either the standard C corporation, the small business S corporation, or the benefit corporation or B corp. The C corporation is the classic legal entity of the vast majority of successful companies in the United States. Corporations can switch from C to S and back again, but not often. The IRS has strict rules for when and how those switches are made.

Keep reading to learn more about the different corporation types, and which kind of business is best suited to each type. This business structure is recommended for companies that are larger and more established, have many employees, intend to sell stock in their company, will be scaling quickly, have many outside investors, or some combination of these traits.

C corporation: What we typically think of when we refer to corporations. With a C corp , all shareholders combine funds and are then given stock in the newly formed business. A C corp is a completely separate tax entity in the eyes of the IRS, meaning that your business can take tax deductions. It also means that earnings can be taxed twice, both as they stand in relation to your business and on your personal taxes, if you take income in the form of dividends.

However, good tax planning can often minimize the impact of double taxation. Most lawyers would agree but verify this with your own lawyer who is familiar with your unique business that the C corporation is the structure that provides the best shielding from personal liability for owners, and provides the best non-tax benefits to owners. Many companies with ambitions of raising major investment capital and eventually going public consider the C corporation.

The S corporation is used for family companies and smaller ownership groups. It often wants to grow and go public, or it already is public. In most states, an S corporation is owned by a limited number of private owners 25 is a common maximum , and only individuals not corporations can hold stock in S corporations.

To become an S corp, you must first set your business up as a corporation within your state, and then request S corp status. So, why would you choose a B corp over a nonprofit? The biggest difference is in terms of ownership —with a nonprofit, there are no owners or shareholders; however, with B corp, which is still a type of corporation, there are still shareholders who actually own the company.

So, a B corp has a social mission, but is still a for-profit company as opposed to a nonprofit , and still has an end goal of returning profits to the shareholders. Here are some things to keep in mind:.