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Start a Business

General Information

When starting a business there are many decisions to be made: what is the name, where will it be located, what does the business provide, and a thousand other things. Two critical decisions are to decide when to incorporate and what the right business structure is. Incorporation is important to help the business operate but also to protect the owners from many of the business's liabilities. There are several types of business structures, the most common of which are C-Corporations, S-Corporations, and LLCs.

Each business has unique needs, potential risks and liabilities, and tax considerations. If you are starting a business with partners or co-founders, it is important to clearly lay out the roles, responsibilities, and ownership interests up front. Picking the best business structure can be difficult, but an experienced business attorney can advise you on the issues and help work through the incorporation process.

Benefits of Incorporating

There is nothing that requires you to incorporate to launch your business, but there are some advantages to incorporating. One of the biggest advantages of incorporating is the limited liability provided to the owners. A properly incorporated and managed corporation or LLC is considered a separate legal entity from the owner. This allows the owners’ to separate and protect their personal assets from the business’s in case of a lawsuit or claim against the business.

Businesses generally need access to capital. Incorporated companies may issue stock to facilitate raising capital from investors. Many banks prefer to do business with incorporated businesses, thus incorporation may make it easier to secure a bank loan. Additionally, corporations are treated different from sole-proprietorships or partnerships (“pass-through” entities) for tax purposes, which may provide more flexibility and make sense for certain businesses.

Incorporated businesses, as separate legal entities from their owners, can exist perpetually. This aspect can make it easier to sell part or all of the business. In contrast, when the owner of a sole proprietorship or owners of a partnership die, the business ceases to exist.

C-Corporation

A C-Corporation, or C-Corp, is a common business structure. One of the primary advantages of a C-Corp is that it provides limited liability to shareholders, i.e. the owners. Corporations are considered a separate legal entity from its shareholders. This means that the corporation, not its shareholders, is held legally responsible for the actions, debts, and liabilities the business incurs.

Corporations are advantageous to certain types of businesses because they can issue stock. The ability to issue and sell stock can help the business to raise capital. Businesses that are going to (or expect to) need venture-backed funding generally need to be C-Corps.

Although corporations have distinct advantages, they also have some disadvantages. For one, they can be costly, in time and money, to start and operate. There are generally higher costs associated with formation and starting up. Additionally, there are continued operational costs due to the increased paperwork and recordkeeping required of corporations. Finally, C-corps are subject to “double taxation,” which means that the profits are taxed at the corporate level and any dividends paid to shareholders are also taxed.

An experienced business attorney help advise you on your unique issues and help file the correct paperwork to properly from your C-Corp.

S-Corporation

An S-Corporation, or S-Corp, is a corporation that has filed documents with the IRS to be taxed as a special type of corporation. An S-Corp eliminates the double taxation issues associated with a C-Corp. Unlike a C-Corp, the profits and losses of an S-Corp can pass through to your personal tax returns.

While the primary difference between an S-Corp and a C-Corp deal with taxes, there are certain other limits such as a cap on the number of shareholders an S-Corp can have. Because an S-Corp is really a special type of C-Corp, the normal corporate rules requiring corporate by-laws, scheduled director and shareholder meetings, minutes from such meetings, and maintenance of other corporate records still apply. An experienced business attorney can advise you on the issues, answer questions in detail, and help file the proper paperwork qualify for S-Corp treatment.

Limited Liability Company

A limited liability company, or LLC, is a good option for many small businesses. LLC’s are a hybrid structure with some features of a C-Corp and some features of a sole-proprietorship or partnership. Similar to a C-Corp, only the company is liable for its actions, debts and liabilities. The owner's’ liability is limited and their personal assets are protected. Unlike corporations, LLCs are generally treated as “pass-through” entities for tax purposes. Similar to a partnership, profits and losses pass through the business to the owner's’ personal tax returns, avoiding the double taxation issue of a corporation. Although you can elect to have your LLC be taxed as a corporation, which makes sense in certain situations.

One of the primary advantages of an LLC is that it combines the limited liability of a corporation with reduced recordkeeping of a partnership. While the costs and time to set up an LLC are generally lower than for a corporation, an experienced business attorney can advise you on the issues and help ensure that the proper paperwork is filed.

Picking The Best Structure

Most companies decide to form as either a C-Corp or an LLC. An experienced business attorney can help you decide which which type of structure is best, based on the many unique factors to your business.

Generally, companies chose to be a C-Corp when they:

  • They plan to raise venture-capital or have a lot of investors
  • They plan to offer employees stock options
  • They plan to IPO

Generally, companies chose to be an LLC when they:

  • Do not plan to raise venture-capital or have many investors
  • Want to minimize administrative costs
  • Primarily want to protect the owner's personal assets

Disadvantages of Incorporating

While there are many benefits to incorporating, there are also some disadvantages. In order to be provided the advantages of an incorporated business, you must follow the applicable local, state, and federal regulations. Corporations require significantly more recordkeeping and following formal procedures such as annual meetings, vote, a minutes book, financial records, and filing annual reports with filing fees with the state incorporated in. Following and ensuring these legal requirements are met takes time and may require hiring outside help.

Double taxation is also a disadvantage to being a C-Corp. Because the corporation is a separate legal entity, taxes are assessed on the corporation’s profits and losses and when the corporation makes dividend payments to shareholders. It is important to note that not all payments made by the corporation to an owner are dividends. Owners can also be employed by the corporation and receive salary, benefits, and bonuses, which are expenses the business can deduct.

Other Business Types

Sole-Proprietorship

A sole-proprietorship is not a formal business structure that must be formed by filing incorporation papers with a state entity. A sole-proprietorship is a business that has not incorporated and has a single owner. Unlike an incorporated business such as an LLC, C-Corp, or S-Corp, a sole-proprietorship owner’s personal assets are not a separate legal entity. Thus, the owner is personally responsible for the actions, debts, and liabilities of the company. Since there is no other structure, the profits and losses from the business are only taxed on the individual’s personal return.

Partnership

A partnership is not formal business structure that must be formed by filing incorporation papers with a state entity. A partnership is like a sole-proprietorship, but with two or more owners. The owners are personally responsible for the actions, debts, and liabilities of the company. Since there is no other structure, the profits and losses from the business are taxed on the individual partners’ returns.

Costs

Cost vary depending on the type of business entity, attorney rates, attorney experience, and necessary turnaround time, among other considerations. Generally, forming a basic LLC will be less expensive than a C-Corp. Additionally there are state filing fees that must be factored into the total cost.

Since each business and agreement is unique, with Kenji you can now easily request custom proposals from vetted attorneys and find the best one for your business – saving you time and money.