By Deborah Sweeney, CEO of MyCorporation
Filing a Corporation is a big deal! You’re taking a big step towards legitimizing your business. When you incorporate, your customers know they can take you seriously as a legal business of the state, you get to protect your personal assets, and you get to save on taxes. Those are pretty much the basics of forming a corporation, but not every small business owner knows these four things about filing a corporation:
The Advantages of a C Corporation
If you want to use your retirement funds to open your new business or franchise, you’re going to have to file a C corporation. There are a lot of benefits that go along with the C corporation, a few of them being: the ability to deduct 100 percent of the health insurance they pay for employees; there’s no limit to the capital and operating losses C corporations can take, meaning the IRS won’t scrutinize your business even if you report losses a couple years in a row; and the profits from a C corporation don’t pass through to the individual owners, so they don’t have an effect on individual tax brackets. The C corporation, though sometimes overlooked, is a great option for many small business owners.
The Differences between an LLC and a Corporation
When you form a Corporation, you get: liability protection, the ability to issue shares (public investment), stock options and retirement plans. With an LLC, you get a generally easier start-up, a simple management process and structure, and pass-through taxation. Aside from the mechanics of running these two entities, the biggest difference between them is the taxation. LLCs and Corporations are taxed differently. An LLC has complete flexibility on how it wants to be taxed, whereas a corporation doesn’t necessarily. A major disadvantage to the corporate designation is its double taxation implications. A corporation’s profit is taxed once as a corporate tax, and the dividends its shareholders receive are then taxed again as an individual tax.
The S Corporation is Always an Option
You can, however, avoid that double taxation typical of a Corporation with an S corp. election. The S-corporation designation does allow flow-through taxation (no corporate tax), as long as your business fulfills certain requirements to qualify as an S corp. that may limit its utility to a business. Firstly, the business must be based in the U.S. It can only have allowable shareholders that include individuals or certain trusts and estates. S corporations cannot be established through partnerships or non-resident alien shareholders. Additionally, they can only have a maximum of 100 shareholders invested in them, along with one class of stock. Corporations that are ineligible for taking on this status include certain financial and insurance organizations. If you hit all of these qualifications, it’s often a good option to still opt for a Corporation filing to have the protection and ability to issue shares as well as gain the tax benefits of an LLC.
You Don’t Need a Lawyer to File a Corporation
Small business owners definitely have the option of using a lawyer to file their business, but it’s not necessary. A trained lawyer can help you make an educated decision about which entity is best for you and your business. They’ll also help you prepare the paperwork. Keep in mind, however, that though a lawyer can help provide advice and perform certain tasks through the life of your business, you’ll still need to hire outside help for some of your business’s upkeep (for example hiring an intellectual property specialist). You’ll also want to understand just how your lawyer is going to charge you for their service. Some lawyers will charge a flat one-time fee for something like incorporating, but be sure to ask if that includes fees such as overnight courier charges and other out-of-pocket expenses. A lot of small business owners are opting to use a filing service to avoid hidden fees and to leave the paperwork to the professionals.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.