If you are starting a new business, you are probably anxious to open the doors and see your plans put into action. However, it is important that you do not skip a step that is crucial to helping ensure the success of your business, which is selecting the most beneficial legal structure for you. Each type of legal structure has its pros and cons, so you should consult with an experienced business lawyer to determine which type of entity will be the most advantageous for your entity.
There are several different types of legal entities available, but below are the three most common:
- Limited Liability Company (LLC). The limited liability company structure is a popular choice among new businesses. The LLC permits its members to own and manage the company jointly. The members share in the profits and losses, while taking advantage of pass-through tax treatment. It is important to remember, however, that every business is unique, so you should confer with an attorney or other tax advisor regarding the tax treatment in your individual situation, but the LLC structure can offer several tax benefits. Finally, and importantly, a LLC provides the business owners protection from personal liability. If a judgment is entered against the LLC, the owners’ personal assets are shielded from any debt collection efforts, except in certain situations such as where fraud or misrepresentation has occurred. The LLC is also extremely flexible in its ability to elect to be taxed as a C-Corp or an S-Corp without incurring high maintenance costs required by corporations in general.
- C-Corporation (C-Corp). The C-corporation can be a complex and costly legal structure to establish, but it can provide a broad variety of significant benefits. The C-Corp is taxed as a separate entity, so the owners are only responsible for paying taxes on the profits they receive from the business. Additionally, a C-Corp is generally in a tax-bracket that is lower than the individual tax rates. If your business will be conducting fundraising, the C-Corp can be a beneficial structure to use. The entity can sell different classes and shares of stock.
- S-Corporation (S-Corp). The S-corporation is similar to the C-Corp, but it is often selected for the tax treatment it is given. The S-Corp is a pass-through entity, which means the profits and losses from the business flow directly to the shareholders. However, the S-Corp is limited to 100 investors, and they must all be individuals and legal United States residents.
The above is a very brief summary of each of the three business entities and there are other important entities to consider. Contact a knowledgeable business attorney at Nielsen Law Group for help with all business formation matters. You can schedule your initial consultation by calling (480) 888-7111 or submitting a web request here.