When you start your own small business, you have to plan a lot of things, including the business's financial and legal structure. One of those things you should consider is incorporation. You aren't required to incorporate in order to run a business, but in many cases, it could save you a lot of legal and financial problems.
Here is more information on the types of incorporation, what types of businesses can benefit from incorporation, and the incorporation process.
Types of Incorporations
Some types offer only limited benefits, while others can have very complicated benefits and requirements. Here are some of the more common types of corporations that can benefit small businesses.
Limited Liability Corporation
Limited liability corporations (LLC) offer a barrier between personal assets and corporate assets. It generally protects you and everyone else associated with your business from having their personal assets subject to a liability lawsuit.
It also has the advantage of a simple tax situation where you and any partners can file profits and losses on a personal tax return. LLCs have very few restrictions and most small businesses are eligible.
If you plan to raise revenue for your company by selling a small amount of shares, then an S corporation can help you raise capital and save on taxes while still protecting you from liability.
Each shareholder files their own taxes based on their own profits at a lower tax rate than if the entire business was taxed. This method prevents double taxation. However, the requirements to file an S corporation are very strict, and the number of shareholders you can have is limited.
C corporations are similar to S corporations in that they are primarily owned by shareholders, but you aren't limited to a certain number.
The business itself is taxed as its own entity, but the shareholders may also be taxed on their profits, resulting in double-taxation. Fortunately, this type of corporation also comes with several benefits. For example, shareholders can be from anywhere, and several tax deductions are also available. In addition, you get the liability protection of any other type of incorporation.
Types of Businesses That Benefit From Incorporation
Anyone who wishes to protect their personal assets from their business liability should think about incorporation. If you are open to the public and have employees, then your risk is high enough for you to benefit from incorporation.
An LLC works well for those operating a small family business or a sole proprietor. Its tax structure is easy to understand and you get protection. If you choose an S or C corporation, then you get to raise capital to build your business, as well as get tax breaks on employee fringe benefits.
Process of Filing for Incorporation
The amount of complication in the incorporation process depends on the type of corporation you choose. The process of incorporating as an LLC is more streamlined than an S or C corporation.
With the latter two types, will need to have a board of directors already in place and discuss incorporation plans with them. This means that you will need more time to prepare and more paperwork to file. Most of the time, you must file the paperwork in a specific order during a certain time frame.
If your business could be at risk for legal action and you want to protect your assets, or you need to incorporate in order to raise funds or reduce tax liability, then you should begin the process. While an attorney is not required in order to incorporate, one can help you complete the steps. He or she can also help with structuring your business before you begin the paperwork and make sure you don't miss any deadlines.
Contact us at Hoffman & Hoffman to get started.