Many of the most important decisions that business owners make take place before they open their doors to their first client. One of these essential decisions is what type of business entity your company will register as. Your business entity is the structure your company takes, and it helps determine the requirements for ownership and taxes.
There is no single “best” option to choose for a business entity. It depends on what your goals for the company are, how large you want your employee size to be, and how you plan on paying your taxes. These are some of the most popular types of business entities:
Limited Liability Company
A Limited Liability Company, known as an LLC, is the simplest form of business entity. For this reason, it is very attractive to business owners, especially freelancers and first-timers. In an LLC, you can have an unlimited number of owners, known as “members.” An LLC also protects the personal assets of its owners, meaning you cannot lose your personal money if the business you own is sued (only the company’s money.)
The downside of an LLC is that it can never go public, and it dissolves if one of the owners leaves. It also is costly to maintain year after year, and is difficult to obtain outside funding for. Some investors will only fund corporations, not LLCs.
S Corporation
Technically speaking, an S corporation is not a business entity. It is a tax filing status. You have to first register as a C corporation, and then submit a form to the IRS to become an S corp. For many business owners, the process is worth it: The S corporation is a structure created to save money on taxes.
Indeed an S corporation generally does save you money on taxes, and it is often best for small businesses. Owners are known as “shareholders,” and you can have up to one hundred of them. However, there are stricter rules regarding the leadership of a S corp. There must be a Board of Directors, and there are strict regulations about holding meetings and keeping all records.
C Corporation
A C corporation is the best business entity if you have ambitions to go public one day. You can have an unlimited number of owners, known as “shareholders.” C corporations are also internationally recognized, which S corporations are not, meaning you can have owners who are located outside of the United States. C corporations are the preferred business entity for investors, so it is much easier to obtain funding than as an LLC.
The biggest downside of the C corporation is that you are taxed at both the corporate and individual level. It is the only business entity of these three where you are taxed twice. It is the most involved and complicated of the business entities, but also the most rewarding for larger companies that seek to become major international players.
Get Business Help Today
Are you ready to pick a business entity and start filing under it? To get the business help available, contact Cove Law, P.A. today! We can help you find the best business entity for your ambitions and get to work today. We know the challenges you are facing are not insurmountable… because we’ve dealt with them ourselves!
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