Owning a business is very serious, and needs to be treated as such. There are so many decisions to be made, including the right structure and incorporation method. With options including sole proprietorship, partnership, and various corporations, there is no shortage of choices to be made. There are three types of corporations that are most commonly used when business choose to incorporate themselves. These are known as C corporations, S corporations, and LLCs, or limited liability companies.

A sole proprietorship is easy and can be created by one person, but starting a corporation will take much more paperwork, licensure, and fees. This causes many business owners to balk at the thought of incorporating, because of the complications involved. However, you need to fully understand your options and how your decision will affect your business before you choose. Here are explanations of the different types of incorporation to help you determine which is right for you.

Limited Liability Companies (LLC)

Limited liability companies require you first to choose a name and then file the articles of organization in the state of operation. Each state has different rules for LLCs, so you need to check and see which ones apply to you.

The benefits of having an LLC far outweigh the effort required to incorporate your business as one. These companies have limited liability, as implied by the name, which means that the corporation is held liable for debt and other obligations, and not the owner. However, the owner is required to pay the taxes, to avoid being double taxed. If the owner dies in an LLC, the company will continue running as long as it is maintained and operated properly. Running an LLC is the most simple incorporation option, because board meetings and directors meetings are not necessary for the business to function. LLC incorporation is the most common type of business incorporation, mainly because of its ease and simplicity. There are twice as many LLCs created each year as corporations, due to the ease of starting an LLC.

If you choose to create a corporation, you’ll be required to file articles of incorporation in the state that you start your business in. These articles include the name of the business, the board of directors, and policies that govern the shareholders. There are advantages to creating a corporation instead of an LLC. When legal matters arise, a corporation is solely responsible for liabilities, and the persons who are involved aren’t held accountable for any debts or obligations. C Corporations are also not limited to the lifetime of their owners, much like an LLC. The company will continue on until the board terminates or dissolves the corporation.

Some people prefer this type of business instead of sole proprietorship for the previously mentioned reasons.

When it comes to taxes, C corporations are required to file taxes as a business, separate from any owner(s). Any dividends that are accumulated by shareholders are taxable to them, as well. Although this might seem like double taxation, it isn’t, and there are benefits. A C corporation is less likely to be audited than a sole proprietorship or a partnership, and the health insurance is 100% deductible.
Like C corporations, S corporations have their own IRS designation. This is based on Chapter 1 of the IRS tax code. The fact that S corporations allow income and loss to be passed through the shareholders makes them an attractive option for new business owners.

No matter what structure you choose, it’s important to talk to an accountant first so that you’re prepared to choose the right incorporation for your company. You can change your mind later, but it is still a good idea to get started with the right type of incorporation.

Owning a business is very serious, and needs to be treated as such. There are so many decisions to be made, including the right structure and incorporation method. With options including sole proprietorship, partnership, and various corporations, there is no shortage of choices to be made. There are three types of corporations that are most commonly used when business choose to incorporate themselves.

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