Starting a business is simultaneously a whole lot of fun and a whole lot of work. And while many who dream of opening up their own establishment often put a lot of thought into the more glamorous aspects of ownership like deciding what product(s) or service(s) they’ll offer, and where to open up shop, there are still a lot of other details to iron out that aren’t as seemingly interesting but every bit as important. How you choose to structure your business will have a huge influence over how your business runs on a daily basis, and how it deals with certain issues like paying taxes, taking on shareholders, and having the ability to reinvest funds. Here in the United States, we offer businesses a few different ways to classify themselves. Each one has its own benefits and drawbacks, but typically, depending on the nature of your business, one structure will be better suited for your specific operation than another. In this article, we’ll help you understand the basics of business structuring by offering an informative yet streamlined, understanding of what these different structures entail and what type of businesses they tend to serve most effectively.
LLC vs C-Corp vs S-Corp: Mapping the Basics of Each Structure
As an American business owner, you are given the chance to register your business in one of a few ways including as an LLC, C-Corp, or S-Corp. These common abbreviations stand for Limited Liability Company, C Corporation, and S Corporation, respectively. There is a lot to know about each of these classifications, but for the sake of keeping things succinct and easy to understand, here’s a basic outline of each structure and what they entail.
Limited Liability Company (LLC): In your daily life, you probably encounter a lot of LLCs. This is because an LLC is a low-maintenance legal entity that tends to fare well for simple businesses. Moreover, for a lot of small business owners, structuring as an LLC is the smart way to go because it offers personal asset protection, is easy to form, requires less paperwork, and allows for unlimited members. As far as disadvantages are concerned, with an LLC you can expect that all of your net profits will be taxed. In addition, it is often difficult to raise outside capital, and your LLC must be dissolved if even one member chooses to leave. Regardless of how ironclad your plan and structure are, there is still an inherent level of risk when starting any type of business. However, oftentimes times LLCs are best for mitigating your risk level as a small business, particularly if you go the route of a partnership as in an LLP (limited liability partnership), but we’ll talk more about partnerships later.
C-Corporation (C-Corp): Like an LLC, a C-Corp is a legal entity and yet another way to structure your business. Structuring as a C-Corp allows you certain freedoms that you won’t have if you choose to go the LLC route, however, it does come with the responsibility of more paperwork and double the taxation. One of the reasons for the increased taxation and paperwork comes as a result of having the option for unlimited shareholders and outside investors. Because of the option for unlimited shareholders, C-Corps are usually very investor friendly, although this does come with the need for a yearly board of directors meeting, giving more people more say in how the business is run. Based on these qualities C-Corps are typically better for larger corporations, and LLCs are ideal for small business owners. Nevertheless, there are sometimes exceptions to consider.
S-Corporation (S-Corp): While it often gets mistakenly labeled as a business structure, an S-Corp is actually a tax status that was created and implemented by Congress back in the 1950s for the purpose of giving small businesses similar tax advantages to those given to corporations. In order to receive S-Corp status, you must first structure your business either as an LLC or a C-Corp. There are a lot of layers that accompany the S-Corp designation, and it will play out differently depending on whether you first structure as an LLC or C-Corp. Ultimately, the decision boils down to the finer details of your business model and determining whether the benefits of the S-Corp status actually aid your business in the long run. When leveraged properly, an S-Corp status can save your business a lot in taxes, but it also comes with its fair share of drawbacks to consider.
Understanding the Reasoning Behind Business Partnerships
Partnerships can be tricky to understand because sometimes they work in tandem with a structure, like, for instance, an LLP (limited liability partnership), and sometimes they operate independently. Although a lot of businesses do structure themselves as either LLC, C-Corp, or S-Corp, you do not necessarily need to go this route in order to operate legally. You have the option of registering as either a sole proprietorship or a partnership. Based on their names, the critical difference between the two is pretty self-explanatory, but essentially a sole proprietorship means you are the sole owner, whereas a partnership involves several owners. A partnership is the default designation/structure for two or more owners who choose not to register as an LLC or C-Corp. There’s a lot of freedom in running your business as a partnership but be very weary of the fact that if you are sued as a partnership and found liable, you put all of the partner’s personal finances at risk. The same is true of sole proprietorship, except in that case there would be no other fall person to assume financial restitution to a successful plaintiff.
In most cases, it is advisable to structure as an LLC or C-Corp over a sole proprietorship or partnership. As mentioned before, you can incorporate tenants of partnerships into LLCs or C-Corps by way of classifying them as an S-Corp or LLP. Generally, these structures help to aid in the legal side of business ownership.
Consult a Professional to Optimize Your Business’s Success
If you’re new to the world of business, you’ll definitely walk away from this post with a greater understanding of structuring. However, there is still so much to consider when structuring your business, and a lot of the reasons for choosing one model over another truly boil down to the specifics of your business, and how you want to protect yourself legally. We highly recommend all prospective business owners talk to a professional, like our team at McGrant Tax & Bookkeeping. Firms like ours can fill in the blanks and make tailored recommendations based on your business. Small business accountant Charlotte NC can also help ensure your success, especially as a small business. Regardless of how you choose to structure your business, make sure you take the proper time to research and weigh all of your options carefully. Starting a business always comes with risks, but there are definitely ways to manage those risks and get far more rewards out of your endeavor, including, running a successful and highly profitable operation.
At McGrant Tax And Bookkeeping, we are here to help answer all your questions as your primary bookkeeper in Charlotte NC Visit our other business location for trustworthy bookkeeping Charlotte NC services. Please feel free to contact us today at any of our two locations or visit our website https://mcgranttax.com and book an online or physical appointment.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. McGrant Tax and Bookkeeping assumes no liability for actions taken in reliance upon the information contained herein.