by Aaron Young, CEO of Laughlin Associates
Selecting the right type of company for a new or existing business is a critical issue. The decision helps maximize the chances of financial and operational success. There are many issues that you should consider, and consulting with an accountant, an attorney or a business specialist will help you so that you choose the right structure and make the best decision.
No matter what type of business you start or operate, at some point, as a result of growth or an increase in income and complexity, it makes sense to consider changing from a sole proprietorship to a higher form of structure, whether it be a limited liability corporation (an LLC), a certain type of corporation.
Sole proprietorships have to pay self-employment tax, which is usually one of the higher tax categories in each state. One primary goal of incorporation is to lower this tax liability. Federal and state laws allow for the recognition of companies as legal entities so that that they can enjoy certain benefits and protections. These include: 1. Protection of personal assets; 2. Perpetual existence and name protection; 3. Tax flexibility and expense deduction.
Deciding which business structure is right for you and which location or state to locate in are critical questions that depend on where you are located, where and how your business operates, where your customers are, and many other issues. Each business structure also has legal and tax implications.
Understanding Your Options.
With a sole proprietorship you are personally liable for all actions. Corporations allow for greater benefits and provide liability protection. A Limited Liability Company, or LLC, allows flexibility of management and taxes. S-Corporations have restrictions on shareholders and are taxed at the individual shareholders’ rates.
Corporations and LLCs offer liability protection, tax savings, credibility, legitimacy, the ability to leave a legacy, estate planning and numerous other benefits, but you should know that not all business structures are created equal. Corporations offer greater benefits, while LLCs and S-Corporations are limited in what they offer, especially if you are the primary shareholder.
Understand Your Obligations.
When you incorporate or form an LLC you are entitled to many outstanding benefits, but to utilize these benefits and maintain the liability protection these business structures provide, you will need to meet their legal obligations to include but not limited to minutes, resolutions, annual meetings and federal and state filings.
When to Form Your Company.
Forming an LLC or incorporating when you start a business is the best way to organize the business and keep personal assets separate from the business and keep them protected from a lawsuit against the company. Protection of personal assets requires you comply with the formalities of operating the company. You must prevent the comingling of personal and corporate assets. The cost associated with forming a Corporation or LLC is minimal compared with a lawsuit.
Picking a Name.
When you pick a company name you will have to make sure it’s available in the state in which you are forming the company. If it is similar to another business name or includes certain restrictive words then the state will reject it. Many people form a company and then use a DBA (doing business as) to brand certain products or services, so don’t panic if the original name you wanted isn’t available.
Where to Locate Your Company.
Most people choose to incorporate in the state in which they do a majority of their business. Some people choose a state with more favorable case law or tax benefits, like Nevada, Wyoming or Delaware. The important thing to remember is that you are making a decision to subject yourself to the law of the land you choose, and you will need to be vigilant, aware and knowledgeable as to the requirements of that state.
How to Form Your Company.
You have three choices when it comes to the official formation of your business: 1. Do-It-Yourself (Filing the documents can be confusing and costly if done wrong.); 2. Hiring an attorney (This can be expensive and will require a high cost to you for ongoing help.); or 3. Utilize a service that specializes in business structuring. (They do it all the time and work with a variety of businesses so they can supply ongoing support and assistance even after the company is formed.)
Decide How Your Company Will Be Taxed.
You must study the options and make the decision that makes the most sense for your business. C-Corporations are taxed at a specified tax rate; S-Corporations are taxed at the individual shareholders’ tax rates. An LLC can be taxed four different ways: as a Sole Proprietorship, a Partnership, a Corporation or an S-Corporation.
Incorporating or forming an LLC allows you to conduct your business in ways that protect you and your family from the possible loss of your home, car or personal savings because of a business liability. Choosing the right business structure will help make your business succeed. Be sure to ask yourself the right questions before making your incorporation decision.
Aaron Young is an expert with over 20 years of experience in advising companies on which type of business form is right for them. His company, Laughlin Associates, is located in Reno, Nevada. He writes a monthly column in Small Business Today and blogs for Small Business 411.