Today I want to talk about four of the primary types of companies or corporations in the U.S. These four business structures are where you start when you decide to form a business. I’m not going to lie, LLC‘s are definitely my recommendation to most everyone. I’ve had a C corp, an S corp and 17 LLC’s in my time. There’s a reason those numbers are weighted so heavily to LLC!
- Sole Proprietorship: With a sole proprietorship, you haven’t incorporated at all. You’re running your business under a business name but you’re reporting it on your personal taxes. For any business deductions on your taxes, you would use a Schedule C. That typically helps lower your income when you’re able to take off your expenses for your business. But I really don’t encourage anyone to do business as a sole proprietor. I know people do and that they have insurance. But one of the biggest problems you have here is your liability exposure. Everything you own and have is exposed. Personally, I have no assets. I don’t own anything, because when you do, you have all kinds of exposure and can become a target. As Nelson Rockefeller said, “The secret to success is to own nothing, but control everything.”
- “C” Corporation: A C corporation is what all the big, public companies are. But a C corp has one unusual distinction: you’re definitely protected, but you don’t control the company personally. Your board of directors do. All C corporations have to pay taxes as a corporation. Additionally, whatever you receive from the C corp, you have to pay taxes on.
- “S” Corporation: An S corporation, or S corp, is really a 1970’s and 80’s type of corporation. One of the advantages was that at some point in the year you could take capital gains distributions. So instead of paying taxes on earned income, you pay tax on capital gains income. S corporations have other benefits too. But right now, most benefits that you get from an S corp, you can get (depending on your state) from an LLC!
- Limited Liability Company: The LLC came around in the mid-80’s and has really evolved over the last 20 years. In a few states, the LLC is still pretty new, but I can tell you that an LLC protects you much more on the liability side. There’s no question that you are protected. Now there are some LLC’s where you can have a president, but I prefer a managing member. A managing member of an LLC is much more protected than a president of an S corp. Another issue in an S corp is that you can only issue participants of 100 individuals in your shares. You’re limited on how many people you can incorporate if you decide to raise capital. With an LLC, there is no limit to the number of shareholders, and therefore you are not limited on how to raise capital. Unless your accountant says there is a reason you should be an S corp, I wouldn’t really recommend it. For most people, the LLC is by far the best way to go. LLC Tip: I always recommend you buy boilerplate articles for an LLC! They are about $50-$100.
So how do you legally start your company? Well the first step in starting a business is to pick your business structure—and my advice to most everyone would be to use an LLC. The only exception to that would be if you happen to live in a state that’s not as LLC friendly.
Note: If it’s a single-member or a two-member LLC, then you probably don’t need an attorney. But if you start taking investments or shares, then you definitely need an attorney to guide you through drafting the document. For that matter, you also need to be talking to an accountant at that point.
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