Startup founders face many questions during the process of turning their dreams into a viable, money-earning business. One of the most important questions that must be addressed in the process involves the legal structure of the company. Business owners need to decide whether or not to incorporate their business.
Types of Corporations
No two business models are exactly the same. For this reason, there are several types of corporation structures to accommodate every owner’s needs. The IRS allows businesses to choose to be taxed as either a “C corporation” or an “S corporation,” according to LegalZoom. Both structures have their benefits and disadvantages.
The S corporation structure is popular with many small-business owners because it has only one level of tax. Companies in this structure pass corporate income, deductions, losses and credits to their shareholders for federal tax purposes, according to the IRS. When setting up an S corporation, business owners should check with their state to understand what the exact requirements are.
Another common type of corporate taxation structure recognized by the IRS is the C-corporation. This structure is somewhat similar to an S corporation. However, there are also some significant differences. The most important difference between the two is that C corporations are subject to double taxes. This means that not only are the company’s shareholders responsible for paying taxes, but the company is as well. In this structure, the shareholders are responsible for taxes on the company’s dividends. At the same time, a business in this structure must pay taxes on its net income. As with S corporations, business owners looking to form a C corporation should consult and understand their state’s requirements to do so.
Benefits of Corporations
Determining the legal structure of your business is an important step to take when turning your dreams into a reality. There are several types of corporations recognized by the IRS, and the benefits of setting up one of these structures are almost endless.
There are five reasons why small businesses should incorporate. Perhaps the most significant is that a corporation protects the entrepreneur’s personal assets if debts or legal judgments are claimed against the business, according to E.J. Dealy of Fox Business. In essence, becoming a corporation allows for business owners to thrive while protecting their own assets in the event of an unfortunate incident.
Another major benefit of becoming incorporated is the increased exposure. When a business is first starting out the number one task is to attract customers and stand out above the crowd. One way to do that is by incorporating your business. As an incorporated entity, it may become easier to attract the clients and vendors needed to help your company succeed.
Becoming an incorporated business not only affects the present status of the company, but it may also impact its future. Taking the steps to incorporate ensures that the business can remain open in the event of major changes.
Incorporated businesses have the opportunity to make use of tax deductions for normal business expenses. Whether the business is a flower shop or a photography studio, owners have the opportunity to deduct supplies and other necessary purchases from their taxes. There are 75 business-related expenses that companies may be able to deduct from their taxes, according to Mark J. Kohler writing for Entrepreneur.
Prior to submitting a tax return, business owners would benefit from combing through their business expenses with a certified public accountant. This should be done to ensure that no deductions are missed and that all deductions are legitimate.
The business world is constantly changing. The benefits of incorporating may be applied to a company that is currently operating under a sole proprietor status and wants to change to a corporation. They can also be applied to a corporation that is just in the process of forming for the first time.
The Next Step
Once business owners have chosen the corporation structure they wish to enter into and have considered its benefits, it is time to put their wishes on paper legally. There are many forms that need to be created, signed and filed during the process of forming a business for legal recognition. Some business owners may choose to file this paperwork on their own. If an owner prefers to have help with these documents, they may choose to use a service such as LegalZoom to complete the process for them.
Establishing the legal structure for a small business is important. The type of structure determines the types of protection afforded to business owners, both personally and professionally. Choosing to operate as either an S or C corporation can offer many benefits to both the owner of the company as well as its shareholders. These benefits can affect the company in the present and may also help preserve it for the future.