Structuring Your Business For Success: Limited Liability, S Corporation, or C Corporation
In creating a new business, one of the most important decisions is how to legally structure it.
A sole proprietorship is perhaps the simplest structure of business; the single owner reports the income and expenses of the business on their own personal tax return. However, the simplicity of an unincorporated business can be risky, as the business debts and responsibilities are not legally distinct from the owner, whereas a Limited Liability Company (LLC) and Corporation are legally separate from its owner.
LLC vs S Corp vs C Corp — What Are The Differences?
There are a number of differences between an LLC, S corporation, and C corporation. However, what generally makes each business structure distinct is how liabilities, taxes, and ownership are considered.
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The personal assets of the owner of an LLC are not used to fulfill business liabilities. An LLC may have a single member—its owner—or several members. The member(s) may elect for the LLC to be taxed as an S corporation or C corporation. By default, an LLC with a single member is taxed in the same way a sole proprietorship is taxed.
An S corporation passes business profits and losses through to the owner’s personal tax returns. The business itself is not taxed and if corporate formalities are followed, the owner’s personal assets are protected from business liabilities. S corporations are allowed a limited number of certain types of shareholders and must file annual reports with the state.
C corporations are taxed as separately from their owners, resulting in what is referred to as double taxation. However, C corporations have more deduction and credit categories. Furthermore, while LLCs cannot issue stock and S corporations have restrictions on shareholders, C corporations can issue stocks to an unlimited number of shareholders, including individuals, corporations, and non-U.S. citizens or entities.
How Should I Structure My Business?
Small business owners who foresee themselves operating with one owner or as a “mom and pop shop” may wish to structure as an LLC for the tax and ownership benefits. For those who wish to pursue raising capital through venture funding or an initial public offering, it may be suitable to structure as a C corporation given the shareholder restrictions of an S corporation.
Whether a business is structured as an LLC, S corporation, or C corporation, there will be several different advantages and disadvantages in any given scenario.
If you are considering incorporating a business or restructuring your existing business, it is best to hire an experienced business attorney to provide counsel. Given the risks and uncertainties of starting a business or operating one at its early stages, consult with a business lawyer to determine the most practically advantageous and compliant option. The best structure for your business depends on its nature as well as the requirements that need to be met.
If you have any questions about how to legally structure your business, call San Diego Business Attorney Christopher Villasenor to help you with next steps.
Call Us Today: 619-375-2956
Email Us: chris@sdlawfirm.net