Understanding Business Structures
Business owners may choose from a variety of company structures, based on their needs and preferences. Especially with the advent of the Limited Liability Company (LLC), the choices for small business are wider and better than ever before. More good news for small business - as the needs of the company changes, the existing business structure can be amended or a new business structure can be formed quickly, easily and affordably.
Below are useful descriptions of the most popular business structures to help you get started.
A general corporation, also known as a "C" corporation, is the most common corporate structure. A general corporation may have an unlimited number of stockholders. Consequently, it is usually chosen by those companies planning to have more than 30 stockholders or large public stock offerings. Since a corporation is a separate legal entity, a stockholder's personal liability is usually limited to the amount of investment in the corporation and no more.
A close corporation is most appropriate for the individual starting a company alone or with a small number of people. There are a few significant differences between a general corporation and a close corporation. A close corporation limits stockholders to a maximum of 30. In addition, many close corporation statutes require that the directors of a close corporation must first offer the shares to existing stockholders before selling to new stockholders. Not all states recognize close corporations.
Subchapter S Corporation
A Subchapter S Corporation is a general corporation that has elected a special tax status with the IRS after the corporation has been formed. Subchapter S corporations are most appropriate for small business owners and entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners. When a general corporation makes a profit, it pays a federal corporate income tax on the profit. If the company also declares a dividend, the stockholders must report the dividend as personal income and pay more taxes. S Corporations avoid this "double taxation" (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the stockholders. For many small businesses, the S Corporation offers the best of both worlds, combining the tax advantages of a sole proprietorship or partnership with the limited liability and enduring life of a corporate structure.
Limited Liability Company (LLC)
The LLC is not a corporation, but it offers many of the same advantages. Many small business owners and entrepreneurs prefer LLC's because they combine the limited liability protection of a corporation with the "pass through"" taxation of a sole proprietorship or partnership. LLC's have additional advantages over corporations:
LLC's allow greater flexibility in management and business organization.
LLC's do not have the ownership restrictions of S Corporations, making them ideal business structures for foreign investors.
LLC's accomplish these aims without the IRS' restrictions of an S Corporation.
LLC's are now available in all 50 states and Washington, D.C. Guidelines for corporations and LLCs are set by each individual state, and vary by state.
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