Changing Your Business Structure
When an entrepreneur is just starting out, choosing a business structure is not always a high priority. Most just choose the default structure of sole proprietorships, which is reserved for companies owned by just one person. Sole proprietorships are often preferred, since they are easy to set up and require the least amount of paperwork.
As your company changes, so may your business structure. You may opt for a corporation, which provides you with the highest level of protection. A corporation is a separate entity from an owner, so should you encounter financial issues in your business, your personal assets will not be affected.
There are two main types of corporations: C Corps and S Corps. One is a legal entity, while the other is used primarily for tax purposes. Read on to learn about which one is right for you.
It is common for business owners to choose C Corps. C Corps offer the strongest protection, so an entrepreneur does not have to worry about losing their home, vehicles or other personal assets should their business go under. It is its own entity.
A C Corp structure allows a company to sell shares or stock. They can also have an unlimited number of shareholders. Profits and losses are owned by the company. Taxes are based on activity within the company. Employee benefits and business expenses are tax deductible.
C Corps, however, are pricey to set up, as there are state and federal filing fees involved. In addition, there are multiple steps to complete. A corporation must have a board of directors with regular meetings. They must file Articles of Incorporation to formally register the business. They must also get a Tax ID Number from the IRS and create corporate bylaws, which are the official rules for operating the company.
An S Corp is a special election for tax purposes. An S Corp allows for pass-through taxation, which means a company is not taxed at the corporate level. It also allows for income-splitting, which means owners can opt for a smaller salary. They can then pay taxes on this smaller salary and receive dividends for the remainder of their compensation.
An S Corp is not beneficial to companies with high revenues, since profits are given to the individuals. S Corps are also limited to a certain number of shareholders. One of the benefits is that if the business suffers losses, they can be written off on personal tax returns.
A business must meet certain qualifications, however, so it is a good idea to consult with a financial adviser or business law attorney.
Learn More About Sole Proprietorship
Sole proprietorship may be the easiest way to go about running your business at first, but corporations offer some additional protections. You can always make changes later on, but should you?
Is a C Corp or S Corp right for your business? Let Orlando sole proprietorship lawyer B.F. Godfrey from Godfrey Legal assess your business and determine the right structure for you. Schedule a consultation today. Fill out the online form or call (407) 890-0023.