Reimagining Your Corporate Structure
It is imperative that small business owners choose the right corporate structure for their companies. Considerations in selecting the appropriate business entity include the presence of partners or investors, how much you earn, what tax deductions are available to you, your business goals, and a range of other considerations. Here are the major corporate structure options for small businesses.
If you’re the single owner of a small business, beginning as a sole proprietorship allows you a running start in offering your products or services. You don’t need a business bank account, an IRS EIN tax ID number, or a doing-business-as registration. You can report your business income on your standard 1040 tax form with a schedule C. However, you have to pay a 15.3 percent self-employment tax on your ordinary business net income, and your personal assets are at risk for business liabilities.
Limited Liability Corporation
A limited liability corporation, or LLC, is a corporate structure that allows you to claim a business name, create a formal brand, document a partnership, and save your personal assets from risk in the event of business liabilities. However, you still have to pay the 15.3 percent self-employment tax. In some states there are also additional taxes, filing fees, and other extra operational expenses.
S Corporations can be extremely beneficial to small businesses with up to 100 shareholders and only one class of stock. S corporations do not pay corporate tax, also known as double tax. Additionally, these corporate structures allow owners to limit the amount of self-employment taxes they pay. Instead of being taxed on the company’s flow-through income, they can take salaries on which they are taxed.
C corporations can have unlimited numbers of shareholders and multiple types of stock. This corporate structure generally benefits larger companies rather than small businesses. One of the main drawbacks of a C corporation for a small business is double taxation. The corporation as an entity is taxed, and shareholders pay personal income taxes on their profits.
For more advice on the best corporate structure for your small business, contact Flipside Capital.