Creating a business requires many choices to be made including name, branding, location and mission. One of the most important choices you will make is what “backbone” you want to establish your company on. The type of company you create can alter your obligations, abilities, and profits. Two common types of companies are corporations and limited liability companies (LLC); both with unique benefits and drawbacks.
A corporation is a business that created through full incorporation to a state. There are other formal statutory requirements for creation including mandatory annual meetings, specific notice for meetings, and bylaws. If you are hoping to create a growing, widely held company with many shareholders and rising capital, a corporation may be a great choice for your company. A corporation is an independent entity that can be undisturbed by the coming and going of shareholders. The structure of a corporation is built around shareholders, who purchase stock ownership. The shareholders all have limited personal liability for debts that the corporation entity has against it. There are two types of corporations, S Corporations and C Corporations, that are taxed differently. C Corporations are separately taxable entities; meaning the corporation itself is taxed at a corporate rate. Then, the profits of the corporation are divided between shareholders and are taxed again as income tax- resulting in hefty double taxes. Conversely, a S Corporation is subject to pass-through taxation, meaning that no income tax is paid the corporate level. Instead, they are reported only on the owner’s personal tax returns.
An LLC is created by filing a Certificate of Organization and creating an internal operating agreement. If your company is looking for flexible management and asset protection and does not plan to raise investment money, an LLC may be a great choice. Because an LLC does not fully incorporate, there is substantially fewer procedural requirements for creation. Similarly, to a corporation, an LLC is its own entity that is distinct from its members. The structure of an LCC is built around members that can be added and proportioned rights and ownership as they see fit. The members of an LLC are not personally liable for any debts of the company. Like a S Corporation, an LLC is a pass-through taxation entity. For some LLCs, this does not always play out to be profitable in which case they have the benefit of choosing to be taxed as a corporation.
The attorneys at Simpson, Jensen, Abels, Fisher & Bouslog, P.C. are experienced in handling complex business issues. Contact us at (515) 288-5000 to discuss your options for creating a new company.