What Type of Corporation Should Your Company Be?
Incorporation is the process of creating a legal entity with a separate juridical personality. This separate entity - the corporation - is recognized by law as a person separate and distinct
When you are setting up a Company one of the most important things you can do is determine if you need to incorporate. If you are new in the business world then you should talk to two professional before you make a decision. First talk to your bookkeeper or CPA (Certified Public Accountant) they will be able to take your business plan and determine which type of corporation will give you the best tax advantages, select the wrong one and you could end up paying unnecessary taxes.
Then you need to find legal counsel to help do the paper work for the type of corporation that you have decided on. This paper work includes the all state required forms to register legally and properly. Most legal counsel will also fill out your Employers Identification Number (EIN) with the federal government. It is very important that you use legal counsel because any error in the paper work could delay your being open for business because you cannot ever open a bank account without this paper work.
Here is the important information that you should know about each type corporations and pros and cons for each: C Corps: This is for a large company that is going to have a lot of shareholders involved in the corporation. C corps are more expensive to start up and require lots of additional legal advice because of the increased regulation generated by both federal and state government.
The main difference with a C Corp versus other corporation is that the profits of the company are taxed at a corporate level, which is substantially lower than the personal tax codes. The biggest disadvantage to a C Corp is that if you distribute the profits to shareholders through dividends, those are also taxed and you are in essence paying taxes twice on the same money.
Sub S Corp: This is a classification for a company that either wants no shareholders or wants no more than 100 shareholders. Taxes are also done differently, they are done on what is called a "pass-though" tax. This means that profits the company makes are not taxed on a corporate level, it is "passed-thorough to the owners of the S Corp. So the profit is equal divided between the officers or shareholders and added to their personal tax return. This is great unless you get to the point where your tax returns are pushing you towards the Alternative Minimum Tax (AMT) bracket; make sure you that you are advised on how this can affect your taxes.
LLC: An LLC (Limited Liability Corporations) are a combination of both a C Corp and an S Corp. It has the structure protection of incorporating without the restrictions placed on an S Corp. Many overseas investors find that this type of corporation is the best way to go. The taxes are done on a "pass-through" basis also.
The one thing that all these corporations have in common is you are setting up a separate legal identity for your company, which will protect you and your personal assets from business debts so if your company has financial problems they will not affect your personal finances. No matter which one you choose you should always consult expert help in determining which type of corporation will work best for your needs.
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