| As your business grows it is likely you will find that you | | | | filed with the state government. |
| need to grow the structure of the business to meet | | | | · Both provide limited liability protection; the |
| the demands. Many small businesses start out as a | | | | owners are typically not personally responsible for the |
| sole proprietorship, meaning you are responsible for | | | | debts and liabilities of the business. However, the |
| everything, but soon with increasing income, partners | | | | officers can be held personally responsible for their |
| and the need for more capital you may find it is time | | | | actions - such as failure to withhold and pay |
| to change the legal structure to take advantage of tax | | | | employment taxes. |
| savings, liability concerns and the ability to raise capital | | | | · Both entities have very few ownership |
| to expand. | | | | restrictions. |
| Corporations provide the ability for a business to raise | | | | Differences |
| capital through share offerings, to exist as their own | | | | · Taxation: |
| entity and reduce the personal liability of its owners | | | | - The LLC is a pass-through tax entity - this means |
| and shareholders. In addition, there are tax advantages | | | | that the income or loss generated by the business is |
| that come with being a corporation - such as the ability | | | | reflected on the personal income tax return of the |
| to write off health and benefit plans of employees. It is | | | | owners. |
| often said that a corporation has a "life of its own" and | | | | - A "C" Corporation is a separately taxable entity. The |
| as such, can exist well beyond the lifetime of the | | | | profits and losses are taxed directly to the corporation. |
| original owners. | | | | · Formalities: |
| However, there are also downfalls to incorporating: | | | | - A "C" Corporation requires that certain formalities be |
| You may find that it results in higher taxes overall | | | | followed. The corporation must hold annual meetings |
| despite the increased write-offs; the cost of | | | | of shareholders and directors each year and meeting |
| incorporating a business is considerable, and requires a | | | | minutes must be kept with the corporation's records. |
| lot of knowledge and legal planning; a corporation is | | | | - A LLC is not required to hold annual meetings; |
| overseen by both local, state and federal entities, | | | | however, it is a good idea to document major |
| which usually requires increased paperwork and | | | | decisions of the company for legal purposes. |
| compliancy on all levels. | | | | · Transferability of Interest: |
| Corporations generally fall under two distinct types: A | | | | - Transferring stock in a corporation is typically easier |
| "C" Corporation (typical) and a Limited Liability | | | | than the transfer of ownership with an LLC. A |
| Company (LLC). There is also what is known as a | | | | shareholder of a corporation is not required to get |
| Subchapter S Corporation, though this is strictly a tax | | | | approval of the other shareholders before selling stock. |
| election only where the earnings and profits are listed | | | | - With an LLC, the usual rule is that the owners must |
| as distributions on a personal tax return. | | | | obtain approval of the other owners before ownership |
| "C" Corporation | | | | can be sold or transferred. |
| A "C" Corporation is the typical model that most | | | | Where to Incorporate |
| corporations follow. Under this model, stock can be | | | | When it comes to incorporating your business you are |
| sold in the company to raise capital, and is considered | | | | not restricted to the state you currently reside in. You |
| a separate taxable entity. After a corporation is | | | | can incorporate in any of the 50 states. Many people |
| formed it exists infinitely as long as yearly fees are | | | | choose to incorporate in their home state where they |
| maintained. | | | | currently are doing business. Doing so may save you |
| To form a corporation, you must file "Articles of | | | | money because corporations are required to register |
| Incorporation" with your state government. You must | | | | as a "foreign corporation" in each state where they do |
| also establish a set of bylaws for your corporation. | | | | business outside of their state of incorporation. |
| While bylaws do not have to be filed with the state, | | | | However, if your home state has a high corporate |
| they are important because they set out the basic | | | | income tax or high state incorporation fee it may be |
| rules that govern the ongoing formalities and decisions | | | | wise to incorporate elsewhere. In addition, certain |
| of corporate life, such as how and when to hold | | | | states are more corporation friendly than others |
| regular and special meetings of directors and | | | | (pro-business). They offer added protections and |
| shareholders and the number of votes that are | | | | further limit the liability of the corporation when it |
| necessary to approve corporate decisions. While this | | | | comes to legal matters, as well as offering less strict |
| may not seem important at first, its value will come into | | | | laws and regulations on what can and cannot be done |
| play when stock is issued outside the ownership of the | | | | within the corporation itself. |
| original owners. | | | | Delaware is a popular choice because of its |
| Limited Liability Company (LLC) | | | | pro-business climate. Over half of the companies listed |
| A Limited Liability Company (LLC) is a hybrid of a "C" | | | | on the New York Stock Exchange are incorporated in |
| Corporation and partnerships. It affords the same | | | | Delaware. Recently, Nevada has also gained popularity |
| protections as a "C" Corporation but allows for the | | | | due to its pro-business environment and lack of a |
| pass-through tax structure of partnerships. It is more | | | | formal information-sharing agreement with the IRS. In |
| difficult to setup an LLC, but it is often easier to run | | | | addition, Nevada does not have corporate income |
| one than a corporation. | | | | taxes. |
| One of the biggest drawbacks to an LLC is that a | | | | As you can imagine, states often compete for |
| court may treat the LLC as an extension of the | | | | businesses to incorporate there. Take your time to |
| owner's personal affairs, rather than as a separate | | | | research the benefits of each, and consult a business |
| entity. In this case none of the protections afforded a | | | | lawyer for advice if you are unsure of the advantages |
| corporation would apply and you would assume all | | | | or disadvantages of a certain location. |
| liability. In order to prevent this from happening it is | | | | When to Incorporate |
| important that you act fairly and legally in all business | | | | There is no set rule or timeline on when you should |
| transactions, keep the business well funded, keep the | | | | incorporate, or even if you have to. Often businesses |
| business funds separate from any personal funds, and | | | | incorporate to take advantage of the limited liability |
| create and maintain an operating agreement. | | | | protection as well as the tax advantages offered by |
| For taxing purposes, an LLC is taxes through the | | | | being a corporation. However, remember that a |
| owner's personal income taxes. The income and | | | | corporation requires strict guidelines, procedures and |
| expenses of the business are listed as distributions on | | | | paperwork that can take valuable time and money |
| Schedule C for sole ownership businesses and IRS | | | | away from a small business, or one that is just getting |
| Form 1065 for businesses with multiple owners. | | | | started. |
| LLC and "C" Corporations Compared | | | | Remember, as a corporation there is more items that |
| Similarities | | | | you can deduct from your taxes, but overall your |
| · Both are considered legal entities and are | | | | taxes may increase. |