Starting a business is an exciting time. You have a dream that turned into a plan. Now it is time to put your plan into action by choosing a business structure to create a business entity. Selecting a structure has a long-lasting impact on business taxes, paperwork requirements, and personal liability.
- Limited Liability Company (LLC): An LLC is a popular choice among new business owners. It has fewer maintenance requirements than a corporation. It is also a separate legal entity from the owner, meaning you are not personally responsible for the conduct and debts of the company.
Additionally, for single-member - or one owner - LLCs the IRS does not require the business itself to pay taxes because they consider it a disregarded entity. However, if you are the sole owner of an LLC, you must report business profits or losses on your individual income tax return.
Like an LLC, a corporation is an independent legal entity from the owner(s). You are not personally responsible for the liabilities and debts of the business. There are two types of corporations: S-Corporations (S-Corp) and C-Corporations (C-Corp). Both options require formalities such as articles of incorporation, corporate bylaws, and director and shareholder meetings.
The main differences between the two corporations are taxes and ownership. Note that your business will be taxed as C-Corp unless you elect to be taxed as an S-Corp.
- Taxes: C-Corp profits are taxed twice, a tax principal known as ‘double taxation.’ Taxes are paid once by the business entity and once by the shareholders.
For example, if your company makes $100,000, the company pays taxes on that profit. The remaining funds are distributed to you and other shareholders. You then pay personal income tax on your dividend.
- Ownership: C-Corps have no shareholder limit.
- Taxes: S-Corps have pass-through taxation. Pass-through taxation means that the business entity does not pay corporate taxes. Instead, the owners pay taxes on the profits or losses of the company on their tax forms.
- Ownership: S-Corps are limited to no more than 100 shareholders.
Business Structures We Advise Against
- General Partnerships: General partnerships are not a good idea because you are personally liable for all business debt, whether incurred by you or your partner. Personal liability opens the floodgates for all sorts of issues that are avoidable with other business structures.
Get Started Today
Business structures impact your business’s taxes, maintenance requirements, and personal liability. The business attorneys at Bountiful Law in Lynnwood help you choose the most advantageous structure for your long-term goals. Call today to schedule a legal consultation at 425-775-900.
Business Formation & Start-Up | Lynnwood, WA Lawyers & Attorneys