Starting a new company is one of the most exciting times for a businessperson. I should know. I’ve started more than 60 businesses during my career as a serial entrepreneur, including Company Alarm.
Like a child with a new toy, new businesses capture your imagination as you dream about the future heights you’ll reach. It’s a rush, and loads of fun, too.
But before you begin your new business adventure, it’s wise to spend a minute thinking about how to structure your company. In the United States, we’re fortunate to have laws allowing for a variety of business structures, each with their own pluses and minuses.
Here I’d like to describe the differences between three of the most common businesses structures: limited-liability companies or LLCs, s corporations and c corporations.
LLCs are the Swiss-army knife of business structures. They’re highly flexible, accommodating different management structures and tax-reporting options. They’re particularly good for business ventures in which you might face lawsuits or debt, because, under the law, LLC owners are not personally responsible for the business’s debts or lawsuits.
In other words, if an LLC goes bankrupt, the owners don’t have to use their own money to pay for the company’s debts or if its sued the owners don’t have to risk losing their homes to cover a settlement.
LLCs typically do not pay taxes themselves. Instead, LLC owners list their business’s profits and losses on their personal tax returns. LLCs can, however, choose to be taxed like a c corporation.
S Corporations are like LLCs in that generally they do not pay income taxes. They’re “pass through” organizations in which the owners once again record their profits and losses on their personal tax returns.
But unlike LLCs, s corporations are far less flexible from a organizational and management standpoint. Under the law, shareholders of an s corporation must be U.S. citizens or resident aliens and there can’t be more than 100 of them.
Like their sister structure, c corporations, s corps are preferred by outside investors, initial public offerings or IPOs and are legally recognized outside of the United States. LLCS don’t enjoy the same legal protections in other countries that they enjoy in America.
The major difference between c corps and s corps is their taxes. S corps are pass-through organizations while c corps file their own, separate tax returns with the Internal Revenue Service.
In both cases, the owners of c corps and s corps are expected to pay personal income taxes on their business profits. But only c corps file their own tax returns separate and apart from their owners’.
The shareholders of c corps are not required to be U.S. citizens or resident aliens. They can be anyone who wishes to invest in your business. And c corps can have more than 100 shareholders – often times well over 100.
The owners of c corps and s corps also enjoy liability protections similar to those afforded LLC owners. But each structure poses positives and negatives for a potential new venture.
If you’re unsure which structure to adopt for your new business, discuss it with a lawyer, who can help you suss out the pros and cons for your specific business needs.
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