The New York Entity Startup Guide, your #1 source for the best attorneys in the Big Apple.
Entity Formation: LLC's Versus Corporation:
The type of business structure you chose for your company will affect the taxes, restrictions, benefits, and filing procedures your business will experience. In a sole proprietorship, taxes related to business profit and loss are filed under the individual’s personal taxes. If the business suffers significant losses shareholders will be held liable for the business’s losses. When deciding to incorporate as a Limited Liability Corporation, or an “S” or “C” Corporation, know which legal corporate structure is more beneficial for your business needs.
Limited Liability Corporation:
This is a popular formation for small businesses because of ease of administration. Unlike in corporations, LLC’s do not require stockholder meetings, board of directors meetings, or keep track of corporate minutes. Unlike in S-corporations, there are no restrictions for foreign investors or member numbers. LLC’s are popular formations for real estate companies because of tax structures. In an LLC, real estate gains are taxed at a capital gains rate, but in C Corporations that are taxed at a corporate tax rate. The disadvantage to an LLC is that there are no self-employment tax benefits, which an S-corporation has. It does however have some liability protection, but will depend on how many owners there are. If you are considering forming an LLC you should check your local incorporation laws to see if this formation is beneficial over an S-Corporation for your business income.
“S” or “C” Corporations:
Corporations have a lot of procedures that must be maintained. You must keep, follow, and update a “Corporate Book”. The book outlines the procedures the board members or other members need to take when opening a bank account for the company or acquiring another business. The book reflects the activities of the company over a specific time period. You must protect your business by following the rules of the book. Holding annual stockholders and board of directors meetings, and documenting corporate minutes are necessities for maintaining corporations.
S-corporations are a tax designation by the IRS indicating that profits and losses by your company will be filed under your personal taxes. Although you are liable for debts your company incurs, you are also free from corporate tax and avoid double-taxation. You also have a self-employment tax benefit, allowing you to save up to 50% on social security taxes and Medicare. You are responsible for keeping a Corporate Book and fulfilling your duties as a corporation.
C-corporations have very rigorous tax structures and are the most complex type of corporation to maintain. They are taxed at the corporate level then once shares are distributed to shareholders, they are taxed individually. However, they are able to distribute multiple classes of stock and have flexibility in ownership (owners are not required to be US citizens). Despite the difficult tax structure, C-corporations have many fringe benefits. They enjoy full deductions for medical expenses, health insurance, and disability insurance. They also have benefits with pension plans, life insurance, and several allowances.
Deciding which structure is the most appropriate type for your business takes a lot of analyzing. You must consider how much profit your business incurs, which tax structure you could benefit best from, and what restrictions are less relevant for your company. If you need assistance in forming your corporation seek professional help to get your business incorporated. It’ll save you from a lot of headaches and potential losses.