Whether you’ve had a business for a while or thinking about starting one, it’s a good idea to make it official. Regardless the reason, there are several ways to incorporate your business in the USA.
Keep in mind that how you choose to incorporate determines the operational, legal, and financial requirements of your business. It also dictates the amount of liability and control the owners have.
Given these points, it’s important to understand the various ways to incorporate your business. You will need to know the different types of corporate structures in order to choose the best one that accommodates your specific needs.
Here’s an overview of how to incorporate your business.
The Different Ways To Incorporate Your Business
(1) S Corporations
Short for ‘Subchapter S corporation’, an S corporation is granted by the Internal Revenue Service as a special tax designation. It allows corporations to pass their corporate deductions, income and credits through to their shareholders.
Instead of paying income taxes, S corporations; individual shareholders split up the income or losses amongst each other. Then, it’s reported on their own personal tax returns.
So, rather than being a business entity type, S corporation is a tax designation. As such, you cannot incorporate as an S corporation. Instead, you have to create a C corporation, and then apply to the IRS for S corporation status.
(2) Limited Liability (LLCs)
A limited liability company or LLC, behaves likes a corporation at the state level. However, at the federal it, it is taxed like a partnership or sole proprietorship.
Different from C corporations, LLCs do not pay corporate income tax. That is, the don’t get taxed on earned income. Instead, the profits or losses flow through to its owners, and are taxed once.
Additionally, instead of having officers and board members, LLCs have members who both run the day to day and own the business.
The rules for LLCs vary by state due to the fact they are created at the state level. There’s no minimum or maximum number of members for LLC in most states. In fact, you can have thousands, like Apple LLC does, or one, like your local dentist office.
Of the different ways you can incorporate your business, an LLC is one of the simplest structures.
(3) C Corporations
C corporations are the stand format for corporations. If you’ve filed a certificate of incorporation with your state, had it approved, and haven’t turned your corporation into an LLC or S corporation, you’re probably operating a C corporation.
Shareholders in a C corporation own shares in the company. Board members make decisions about the direction of the company on behalf of the shareholders. And officers who manage the company day to day, like a CEO or CFO.
Owners of a C corporation pay taxes and are taxed at a special corporate tax rate.
Why Should You Incorporate?
While there are many reasons why people form corporations, limited liability is generally the main reason. Formalizing a business gives each owner a chance to clearly spell out responsibilities and evaluate the business.
Corporations also often pay taxes lower than individuals because they pay at a special corporate tax rate.
In addition to also looking official, incorporating makes it easier to get investors because there are shareholders. As such, investors are more likely to give money if they get a stock certificate in exchange for it.
Still not sure how to incorporate or which of the ways to incorporate your business is right for you? Get in touch with our tax experts for help!
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