If you want your growing business to be taken seriously, at some point you have to consider incorporating.
It could mean more recordkeeping, fees and taxes, but incorporation can also bring liability protections and tax benefits. Three common corporate structures are C corporations, S corporations and limited liability companies (LLCs).
C corporations are the most common for a number of reasons. They are a separate legal entity that’s wholly controlled by shareholders, which shields business owners from liability and debt. C-corps can have an unlimited number of shareholders, and ownership can be transferred easily in event of a sale. But these benefits come at a higher cost and require annual director meetings and ongoing filing requirements.
S corporations let you avoid the double taxation of corporate profits that C corporations can face, but shareholders are limited to 100.
LLCs also let you avoid double taxation (profits and losses are reported on partners’ individual tax returns). There’s no need for annual meetings, but selling the business can be trickier and case law on LLCs is still evolving. And investors may be more comfortable with a more formal corporate structure.
There are a whole host of other issues to consider, including where to incorporate, so this is absolutely something where you want to consult with a business attorney.
Adapted from A Brief Guide to Incorporating Your Small Business at Small Business Computing.