Incorporation

The key innovation of any corporation is the idea of creating a legal entity separate from the people running the business. If a partnership or sole proprietorship runs out of money, the owner or partners risk being pursued by creditors of the business.

In contrast, a corporation makes business contracts directly with its creditors, and those creditors can’t pursue the shareholders for the corporation’s debts. If your corporation can’t pay its debts and becomes insolvent, it will be liquidated and any assets it owns will be sold and the proceeds divided amongst the creditors. As a result, the liability of the shareholders is limited to the amount of capital invested in the corporation and their personal assets are safe.

A C Corporation is the classic model of corporation. A C Corporation is a separate legal entity that provides the shareholders with limited liability. Shareholders can only lose what they invest, which makes C Corporations attractive for investors.

Many large businesses are C Corporations because the number of potential shareholders isn’t limited. If you’re looking to form a company that allows for large-scale growth, becoming incorporated as a C Corporation is a necessary and helpful first step.

Limited liability means your personal assets are safe from your corporation’s creditors. With your business established as a separate legal entity, you’re no longer personally responsible for any debts it accumulates.

C Corporations can issue new share capital making them ideal for investment. The original owners of the corporation can choose to issue non-voting or limited voting shares so that their voting strength is not diluted and they maintain control of the company.

There are also potential tax benefits to forming a C Corporation. A corporation may be able to deduct operating expenses, employee benefits and compensation, and other costs off its taxes, resulting in considerable savings every year. On the other hand, C corporations are subject to ‘double taxation’ in the sense that the corporation pays tax on its income and the shareholders are also liable for taxation on any dividends they receive.

Gaining corporation status also adds credibility to your business. Becoming a corporation is a great way to prove your professionalism and legitimacy to potential clients or customers.

An LLC is a hybrid business structure that combines broad flexibility regarding taxation with the limited liability of a corporation. If you’re looking to start a new business, forming an LLC may be a great option.

LLCs can have an unlimited number of owners, called members. They also have fewer regulatory requirements than corporations and less detailed governing legislation.

Where permitted under state law, incorporating as an LLC is a popular choice for sole proprietors. Registering as an LLC allows the sole member to have the protection of a Limited Liability company while maintaining complete ownership.

The members of an LLC are protected by limited liability just like the stockholders in a corporation. The regulatory requirements are less onerous compared with a corporation. Pass-through taxation ensures you only pay tax once.

Both an LLC and a C Corporation feature limited liability for the members or stockholders.

C Corporations can sell and trade shares publicly whereas LLCs cannot. If you’re looking to gain business investors, a C Corporation is a the better option.

Corporations tend to require more maintenance. They must hold annual meetings with shareholders and document these meetings with Corporate Minutes. These minutes are sometimes required in a corporation’s Annual Report, which the corporation must send to investors.

LLCs and C Corporations are often taxed differently. However, how your corporation is taxed will depend on your jurisdiction and structure. Every jurisdiction has its own set of compliance obligations and taxation laws.

LLCs are easy to maintain, which makes them a great business formation for self-employed individuals and small-business owners. They also require less paperwork than a corporation.

Forming an LLC allows business owners to separate their personal finances from those of the business. For example, as the owner of an LLC, you aren’t personally responsible for any debts your business accumulates. Similarly, your personal debt and credit rating won’t affect your business.

Unlike corporations, LLC owners aren't required to file annual reports or hold shareholder meetings. Like a corporation, an LLC is a separate legal person. This makes succession issues, following the death of the original owner, more straightforward.

One of the main reasons for creating an LLC is the taxation flexibility where the owner can elect to be treated as a sole proprietorship, partnership, S corporation, or C Corporation. As a business owner, this allows you to maximize your earnings.

The S Corporation is designed to avoid the ‘double taxation’ issue affecting C Corporations and LLCs by applying a tax treatment similar to that of partnerships. A C Corporation (or an LLC) designates itself an S Corporation for a given tax year by making an election to that effect with the IRS. The corporation then benefits from pass-through taxation, meaning that the profits pass through the corporation and are taxed directly as the personal income of the shareholders, thus avoiding corporate tax.

In order to make the election, certain criteria must be met. The S Corporation is limited to 100 shareholders and one class of shares so it is more difficult to attract investors. If you do admit more shareholders, the shares they hold will have the same voting rights as those of the original owners. S Corporations are more common for smaller enterprises and family businesses.

A nonprofit is a type of business structure that’s often eligible for sales, property, and income tax exemptions (if properly organized) and doesn’t earn profits. Nonprofits generally provide a public, mutual, or religious benefit.

Plenty of different organizations qualify as nonprofits, such as churches, political organizations, schools, and social clubs. Generally, a nonprofit raises funds for a cause by donations and must use all profits to further benefit said clause.