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Everyone who starts their own business will need to answer this question. From Fortune 500 companies to one person businesses, every business has a structure, even if you have not explicitly chosen one.
Each structure offers benefits and tradeoffs. The one that makes the most sense for your business, will depend on your goals and personal situation.
These structures are the simplest, however they do not offer any separation between the owner(s) and either income or liability.
This structure is simple to establish and maintain, however the owners are personally liable for the business financial obligations and all the income produced is added directly to the owner’s tax return.
A C-Corp is legally a separate entity from its owners, this makes it easier to issue stock, raise funds and transfer ownership. C-Corp’s are often best for larger companies that will outlive their owners. There may be some tax advantages, including more allowed deductible business expenses and increased liability protection.
However, the C-Corp is expensive to set up, the paperwork and formality are the highest. And income may be taxed twice, once at the corporate level, and another when dividends are distributed.
The S-Corp is taxed like a sole proprietorship, the income will pass directly to the owner’s personal tax return. S-Corp’s avoid the double taxation C-Corp’s struggle with, while benefiting from many of the same tax advantages. And owners are shielded from personal liability for the company’s financial obligations.
However, S-Corp’s do not have all the tax-deductible expenses from a C-Corp, and have more restrictions than a C-Corp. S-Corp’s must have 100 or fewer shareholders, they must be U.S. Citizens, and there is still a significant cost and time investment to set up a S-Corp.
An LLC is a mix between a Sole Proprietorship and a corporation. It offers easier management, pass through taxation and liability protection. However, there is no option for stock. The LLC is often a good middle ground for small to medium sized businesses. The LLC is typically more difficult to form than a sole proprietorship or partnership and does not offer all the same options of a full corporation.
This is simply an overview is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding the best business structure for your organization.
If you would like to set up a complimentary meeting to speak to one of our CERTIFIED FINANCIAL PLANNERS™, Logan Whitlock or Linus Whitlock, about your business, and which structure makes the most sense, please feel free to give us a call or send us an email and ask for a complimentary financial review.