A sole proprietorship is relatively easy to set up because there are few special forms to file and the cost is modest. Typically, a resale license and tax ID number are the basic requirements.
Limited Liability Corporation (LLC) and S-Corporation
A corporate structure, including a Limited Liability Corporation is a separate legal and tax entity. An LLC is a bit more complicated to structure and file than a sole proprietorship. In most states, you must file with the Secretary of State's office. Many states allow you to complete your filing online.
Conduct an online search for the office of the Secretary of State where you reside. Visit the website and find out what is required. In most cases, your filing must include your IRS Employer Identification Number (EIN) and Articles of Incorporation, listing board members, stockholders and the number of shares owned by all parties. You can file for an EIN number by visiting the IRS website.
Your state will charge a filing fee. In addition, depending on the laws of your state, you must also elect and name officers of the LLC, which is usually a president, vice president and secretary who will run the company. You must also keep records of important business decisions and other formalities. Again, the website for your Secretary of State will have details on what is required, when fees are due, and types of documents you are required to file with the office of your Secretary of State.
There are advantages to starting with an LLC or S-Corporate structure for start-up companies. Typically, it is anticipated that you will incur more expenses than income in the beginning phases of the business. As a result, it is anticipated that the income will "pass through" to you and the business. An LLC gives you the advantage of claiming business deductions and losses. Always consult with a business attorney and an accountant to find if an LLC or S-Corporation is the right route to take.
If you are going to seek investors and raise capital you will be required to form a corporation. This is required so that you can formally and legally issue stock to investors. In addition, you can also provide employee stock ownership to attract the level of talent that your venture will require.
Unlike sole proprietorships, LLCs and S-Corporations - a formal corporation is viewed as a distinct entity - separate from the owners in all regards. The corporation itself pays taxes on profits earned and "retained" at the end of the corporation's tax year. And once the corporation becomes profitable to the point where it pays dividends to shareholders - the corporation pays taxes on the dividends paid out.
Owners who work for the corporation receive a salary, versus having income "pass through" as is the case with a sole proprietorship, LLC or S-Corporation. Therefore, you file corporate tax returns for the business and file personal income taxes as a salaried employee.
How taxes are determined is extremely complicated. For example, under a corporate structure, during the first years of operation a business might easily pay less in taxes than an LLC or S-Corporation because corporations pay lower tax rates.
Speak to a Business Attorney and Accountant
It is critical that you get advice from an experienced lawyer and business accountant. They will explain the pros and cons of each structure and help you determine which structure is best for the phase of your venture.
You are not "stuck" or permanently tied to any structure - although there are usually requirements to "dissolve" the structure in place in order to convert to a new one. Often, you may start as a sole proprietorship or LLC - and then advance and convert to a full-fledged corporation as your business grows and you take on investors.
Before you legally file any structure - get professional advice.
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One of the first and most important decisions new business owners and entrepreneurs must make is how to structure the business. Making the choice between a corporation, LLC,
or sole proprietorship depends on many factors --- from the number of owners to your financial situation, and from investment requirements to protection from personal, business and investor liabilities and tax requirements.
What's the best structure
for your business?
LLC ... S Corporation ... Corporation ...
Before you take on a business partner - make sure you're a good match.