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Incorporation TypesYou’ve decided to start a business and know the wise move is to form a business entity. This means submitting yourself to the murky world of incorporation types available to you. The first thing to understand with incorporation is there are many different types of business entities available to you. Some, as you can imagine, are better than others. Understanding which ones are best for a particular business is highly dependent upon the nature of that business. In short, there is no choice that is “always right”. Incorporation Types The number one business entity is the “C” corporation. This is the classic business entity that has been around for hundreds of years. The corporation provides liability protection for shareholders. Shareholders are the owners of the entity. Profits are distributed through salary and dividends. The “S” corporation is the same entity as the “C” corporation, but is treated differently in a number of ways. In California, there cannot be more than 75 shareholders. From a tax perspective, the “S” corp passes through its profits to shareholders much like a partnership and considered a better tax entity than the classic “C” corporation. The limited liability company is another popular incorporation option in California. It is actually considered a bit of a trap entity for most businesses, to wit, a bad choice. Why? California charges a gross income tax on LLCs. “Gross” means the tax is applied to your revenues before you take any deductions. LLCs have their place in California, but a legal review should be done before picking this entity. Next we have the exotic business entity choices. These range from professional corporations that are only available to professionally licensed individuals like lawyers, doctors and so on to limited partnerships combined with a general partnership designated as a corporation to create liability protection. Any of these types of business entities should only be pursued with the help of legal counsel. What about sole proprietorships, partnerships and trust? These choices are often used for business purposes, but they are not incorporated. As such, they don’t fall within the scope of the discussion of incorporation types in this article. ******************************** The above discussion is intended to be a general commentary on legal issues. Each situation is different and this article is not intended as legal advice for your specific situation. Further, nothing in this article is intended to create an attorney-client relationship. If you have additional questions, please contact me. |
