The 3 Most Important Legal Structures For Your Business
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1. - The Limited Liability Company (LLC). - LLCs are one of the most popular forms of legal entities
because they are relatively easy to set up and can offer favorable tax advantages.
First and foremost, setting up an LLC gives a business owner limited liability in protecting his or her personal assets. Should anything go wrong with the business and should a legal issue arise, generally speaking, your personal assets will be protected; insofar as you haven’t made any personal guarantees to the business. You can select whether you want to set up your LLC as a sole proprietor or as a partnership with more than one member. One of the most important features of an LLC is that income is not taxed at the corporate level, but rather is passed directly through to the individual Members who own a percentage stake in the company.
2. - The S Corporation. - S corps and LLCs are similar in that profits and losses are passed through directly to the individual shareholders. Where the two structures differ most substantially is in their compliance obligations. Whereas an LLC uses an operating agreement to outline the governance of the company, an S corp typically calls for a corporate charter and bylaws, setting up a board of directors and filing annual reports.
S Corps generally sit in between LLCs and C Corps because income is not double taxed, but the business requires more formal regulatory oversight. As a small business with few charts of accounts, the extra reporting will most likely be superfluous. Additionally, an S Corp is limited to 100 investors, and those investors need to meet certain criteria that keep the company compliant. As a startup, it’s good to know what an S Corp is, but it’s probably not a structure that you’ll often use.
3. - The C Corporation. - Perhaps the most salient difference between a C Corp and an LLC and S Corp is taxation. C Corps are taxed at the corporate level, so any income that flows through to owners and investors in the company will essentially get taxed twice. But the benefits for a company to be set up this way can be quite advantageous. If you have a large number of investors, sending out lots of K1s (in the case of LLCs) and dealing with individuals’ personal tax issues can become very cumbersome, time consuming, and costly. Allowing investors to handle their own returns can save time and money.
Source: BusinessInsider
Patty Block, President and Founder of The Block Group, established her company to advocate for women-owned businesses, helping them position their companies for strategic growth. Charting the course for impactful, sustainable, profitable businesses, the beacon is control: of your strategic direction, your money, your time, your staffing, and your ability to bring in business. The Block Group brings together the people, resources and ideas that build results.
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