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Your business’s legal structure can make a big difference. Ensure that when you are choosing a business structure, you set your business up for success. Reach your goals and plan for your business’s growing needs. There are many factors when making this choice. These legal and tax consequences will affect your company for many years. It is crucial that you choose the proper structure for your business.
So how can you know what is the right way to set up your business? First, you should learn some basics about the available business structures. The most common types of legal entities include Corporations, Partnerships, or LLCs. The below defines each type of entity. Your goal should be to know the basics of each. In doing so, you will rule out some entity types right off the bat, which makes things easier. If you are like most people, you will narrow down your best option to one or two types of business structures.
A few questions to ask when setting up your business:
Always consult your tax advisor before setting up your corporation. You will thank yourself later.
A corporation is a legal entity considered separate and distinct from its owners. A Corporation will usually have the same rights and responsibilities that individuals have. These include entering into contracts, making loans, borrowing money, hiring employees, owning assets, and paying taxes. A Corporation issues stock shares that other legal entities, primarily individuals, will own.
The two most common types of corporations created are S-Corporations and C-Corporations (C-Corp).
The main difference between an S-Corp and C-Corp is the taxation of the company’s net income. Shareholders own a C-Corp and are taxed as separate entities.
A C-Corp pays a flat tax rate of 21%. An S-Corp typically pays tax based on the individual tax rate of the shareholder. Tax rates for an S-Corp do have limits, so please consult with your tax advisor. Also, with an S-Corp, there can only be one class of stock. In an S-Corp, all shareholders must be treated the same.
Both corporation types provide limited liability protection to owners. This protection means owners generally are not responsible for the Corporation's debts and liabilities. If you work in the Corporation, the shareholder must pay themselves as W-2 employees for wages earned. This is the case no matter the Corporation type.
A partnership is a business form where two or more individuals agree to operate as co-owners. Partners can have any share of ownership, but the total must equal 100 percent.
There are two types of partnerships: a general partnership and a limited partnership.
In a general partnership, all partners contribute to the business's daily management. Partners have the authority to make decisions and enter into business contracts. Responsibilities, liabilities, and contributions are generally equal between partners unless stated otherwise.
In a limited partnership, one or more of the partners are not involved in daily management. These individuals are limited partners. A limited partner is generally not liable for the business's debts, unlike that of a general partner.
An LLC (limited liability company) is a business structure that offers limited liability protection. This protection applies to each of its members or owners. An LLC provides flexibility in defining each member’s role within the business.
There are two types of LLCs: Single-Member LLC and Multi-Member LLC.
A single-member LLC is a limited liability company with a single owner. For tax purposes, the IRS considers a single-member LLC as a disregarded entity. In a disregarded entity, the IRS ignores it for tax purposes. The IRS collects the business’s taxes through the owner’s tax return.
A multi-member LLC is a Limited Liability Company with more than one owner. It is a separate legal entity from its owners but not a separate tax entity.
Setting up your business involves more than just picking a name and filing paperwork. It involves adhering to certain state and federal requirements. Midland Forms ensures your business complies with these rules. We offer more services that you can choose when setting up and managing your business. You can select one or all these services based on your specific needs.
An EIN, or Employer Identification Number, is a unique nine-digit number. It is like a Social Security Number assigned to a business for tax filing purposes. If you’re performing or providing any of the below per the IRS, you would want to make sure your business has an EIN:
A registered agent is an individual or entity who can accept service of process or official mail. They must be in the state of your business’s registration. All US states require all registered business entities to appoint a registered agent. If you register your business in more than one state, you will need a registered agent in each state.
Almost all states require that you file annual business renewals or an annual report. Most renewals and annual reports are due at the start of the year. They have a yearly renewal fee assessed by the state of your business’s registration.
An S-Corp Election is a form of corporate tax that avoids double taxation. In a C-Corp, profits can be taxed at the corporate tax rate. Profits are then taxed to the individual shareholder on their income tax return. In an S-Corp, profits are not taxed at the corporate rate. Instead, profits are only reported on the shareholder’s tax return and K-1.
For a Corporation to be eligible for S-Corp status, it cannot have more than 100 shareholders. It may also not have publicly traded shares. To elect taxation as an S-Corp, you must file paperwork within a certain period of incorporating.
Use this table as a quick overview of the different types of business entities.
| Single Member LLC | Multi-Member LLC | General Partnership | Limited Partnership | C Corporation | |
|---|---|---|---|---|---|
| OWNERSHIP | One owner called “Member” | Multiple members called “Members” | Two or more called “Partners” | Two or more called “Partners” | One or more called “Shareholders” |
| LIABILITY | Not usually personally liable (subject to state laws) | Not usually personally liable (subject to state laws) | Personal liability is unlimited unless it is a Limited Partnership | Personal liability is unlimited unless it is a Limited Partnership | Limited liability of owners |
| MANAGEMENT | Very Flexible and can be structured in a variety of ways | Very Flexible and can be structured in a variety of ways | Two or more partners with rights and duties typically proportional to ownership | General partner managers day-to-day activities and limited partner(s) have limited management rights | Management: Shareholders elect Board of Directors, and Board of Directors elect Officers; Officers manage the day-to-day |
| BEST USE | Those with brand new rental property; multi-entity structuring; operational business start up that converts to s-corp later | Those with family businesses; asset protection purposes | Those needing an infusion of cash that a partner can provide; bridging the gap in expertise and knowledge; when looking for more business opportunities | Those needing an infusion of cash that a partner can provide; bridging the gap in expertise and knowledge; when looking for more business opportunities | Those looking to attract venture capital and other types of equity financing, or those planning an IPO |