Selecting the Right Business Structure

To get the most out of your small business, choose the right structure. Selecting the right type of company for your new business helps maximize your chances of financial and operational success. Common business structures include: C Corporations

• Independent legal and tax structures separate from their owners
• Help separate your personal assets from your business debts
• No limit to the number of shareholders
• Taxed on corporate profits and shareholder dividends
• Must hold annual meetings and record meeting minutes

The Internal Revenue Service (IRS) refers to general corporations as "C" Corporations. Forming a C Corporation allows a business owner to create a separate legal structure that can shield their personal assets from judgments against the business. Unless a corporation applies for S Corporation status, the IRS taxes corporate profits as well as dividends paid to shareholders. Many tax professionals refer to this scenario as "double taxation."

Benefits of a C Corporation

This tried-and-true business structure has many advantages, including:

• Limited liability for directors, officers, shareholders, and employees
• Attract investors through the sale of shares of stock
• Can issue more than one type of stock (example: common and preferred classes)
• No limit to number of shareholders, who need not be U.S. citizens or residents
• Perpetual existence, even if an owner leaves the business
• Can deduct ordinary business expenses as well as benefits to employees
• Can split profit and loss between owners and the business for a possible lower overall tax rate

Limited Liability Companies (LLCs)

• Independent legal structures separate from their owners
• Help separate your personal assets from your business debts
• Taxed similarly to a sole proprietorship (if one owner) or a partnership (if multiple owners)
• No limit to the number of owners
• Not required to hold annual meetings or record minutes
• Governed by operating agreements

A Limited Liability Company (LLC) combines the tax flexibility of a partnership with the personal liability protection of a corporation. LLC owners report their share of business profit and loss on their personal tax returns, similar to tax reporting for a general partnership. Forming an LLC can help you separate yourself from your business, protecting your personal assets in the event of a judgment against the company. All 50 states and the District of Columbia now recognize this popular business type.

Protect Your Assets

This business structure has many advantages, including:

• Owners have limited liability for business debts and obligations.
• Owners can report their share of profit and loss on their individual tax returns without filing a separate corporate tax return.
• Owners do not need to be U.S. citizens or permanent residents.
• LLCs do not need to hold annual meetings or record meeting minutes (though we recommend it).
• LLCs can be owned by individuals or other companies.

Partnerships

• Partners remain personally liable for lawsuits filed against the business
• Usually no state filing required to form a partnership
• Easy to form and operate
• Owners report their share of profit and loss in the company on their personal tax returns

S Corporations

• Independent legal and tax structures separate from their owners
• Help separate your personal assets from your business debts
• Owners report their share of profit and loss in the company on their personal tax returns
• Limits on number of shareholders, who must be U.S. citizens or residents
• Must hold annual meetings and record meeting minutes

S Corporations get their name from a unique section of the Internal Revenue Service (IRS) code. A corporation can eliminate the disadvantage of double taxation of corporate income and shareholder dividends by applying for S Corporation status. Owners report profit and loss on their individual tax returns. They still have the opportunity to separate and protect their personal assets from judgments against the business.

Benefits of an S Corporation

• Limited liability for directors, officers, shareholders, and employees
• Owners can report their share of profit and loss on their individual tax returns
• Attract investors through the sale of shares of stock
• Perpetual existence, even if an owner leaves the business

Sole Proprietorships

• Owner remains personally liable for lawsuits filed against the business
• No state filing required to form a sole proprietorship
• Easy to form and operate
• Owner reports business profit and loss on their personal tax return

Small business owners should consider the advantages of both a corporation and a Limited Liability Company (LLC) when forming a new company. Selecting the right structure can help you maximize your chances for success. Though corporations and LLCs can both help protect personal assets from business debts, they differ in the following respects:

Advantages of a Corporation May issue shares of stock to attract investors Corporate income splitting may help lower overall tax liability	Advantages of an LLC Has no limit to the number of owners Owners can report profit and loss on their individual tax returns Not required to hold annual meetings or record minutes
Disadvantages of a Corporation Double taxation of corporate profits and shareholder dividends Must hold annual meetings and record minutes S Corporations have restrictions on number of owners	Disadvantages of an LLC Cannot engage in corporate income splitting to lower tax liability Cannot issue stock

Note: LLC owners can elect for the IRS to tax the LLC as a sole proprietorship, partnership, C Corporation, or S Corporation. Owners make this election through the IRS after the company forms with the state.