If your small business is now a thriving company, one of the smartest things you can do is to get incorporated. But between LLCs, S-Corps and C-Corps, it’s hard to even know where to begin. Fortunately, we have the information you need to make sense of it all.
Before you start the legal process to get your business incorporated, ask yourself if it’s really necessary at all. The main reason businesses become incorporated is because your liability is limited to the amount you’ve invested in your company. It also gives your company longevity if you were to leave the business or sell it. Another great reason to incorporate is because it’s easier to raise money to fund your endeavor – not to mention it makes your company sound more legitimate.
One the downside, incorporating your business leaves you responsible for record keeping requirements, which increases your administrative requirements. It can also potentially create a tax burden.
If it sounds like moving forward with incorporating is still a smart move for you, here are the three options that you’ll have to choose from:
- Limited Liability Company (LLC). This option combines a partnership with the protection offered by a corporation. One of the benefits of an LLC is that the profits and losses will carry through to the personal income tax return of the members. An owner can use losses to offset other income, but only up to the amount they originally invested.
- C-Corporation. This is the most basic type of corporation but is generally not a good option for small companies due to its high tax rates. It allows shares to be traded among an unlimited number of owners, which makes it a good tax option if you want to take a company public or conduct a tax-free merger.
- S-Corporation. This option is a great way to avoid the high-taxes associated with a C-Corp. Ownership in an S-Corp is limited to no more than 100 U.S. shareholders and includes one class of stock. It’s a good choice if your company can’t legally organize as an LLC.
Now that you know your three options, it’s time to contact your lawyer and get the process started. Generally, forming a corporation will cost you between $500 to $1,000 for a basic C- or S-Corp. Your attorney will prepare and file your articles of incorporation and then help you get your Federal Employer Identifier Number from the IRS. They can also help you managed the annual state filings and make sure you stay in compliance with your state’s corporate requirements.
Keep in mind, that running a business requires risk. So, even if your business is just getting off the ground, taking the time to consider incorporating is critical. It can give you the protection you need if and when something goes wrong.