Learn how to choose the right legal structure for your business.

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1. How many owners will your company have?

Depending on how many people are in your company it could change your business structure. For example, partnerships must have two or more owners, while S-Corporations can’t have more than 100 owners.

2. Will any of the following be owners of your company?

Some business entity types require that they company be owned by individuals, like sole proprietorship and S-Corporation. And owners of an S-Corporation must be a residents and citizens of the US.

Financing the business

3. How will you finance your business? (select all that apply)

When looking to get funding for your company, some investors prefer investing in specific types of businesses. For example, banks typically prefer companies to be incorporated and venture capitalists lend mostly to C corporations.

Your Specific Industry

4. Is your business industry vulnerable to lawsuits?

It’s important to consider the probability of a lawsuit for your company when choosing your business type. For example, a general contractor in the construction industry is at greater risk for a lawsuit than a graphic designer and needs additional legal protection.

5. Does your industry require a state license? (e.g. doctor, attorney, accountant, architect, etc.)

Answering yes to this question rules out LP as an option because most states require that licensed professionals form as a limited liability partnership, professional corporation, or professional limited liability company.

6. Will the primary purpose of your business be to own real estate for investment?

If you are a real estate professional, LLCs are the preferred business entity for investors. Often, they choose a formal business structure for each investment property that they own.

Your Company’s Income

7. What kind of income do you expect your business to earn? (select all that apply)

It is helpful to estimate your company's revenue when choosing a business entity as it will impact your tax structure. At IncorpNation, we recommend that you enlist the services of an accountant for any discussions of tax implications.

8. Do any of the following apply to your business situation? (select all that apply)

C corporation are a very favorable business entity type, although, your personal situation may vary. And don’t forget, any tax year-end date that is not December 31 will rule out LP and LLP.

Your Tax Structure

9. Do you want pass-through taxation?
(No income paid at the business level, profits/losses reported on owners' personal tax return and any tax due on business income paid at the individual level)

If you answer YES to this question, C-Corporation is ruled out as an option since taxes are paid by the entity. Pass-through taxation means a business’s income and losses are not taxed to the business entity, but instead by the individual. These include sole proprietors, partnerships, LLCs and S-Corporations.

10. Do you want to minimize self-employment taxes?

Usually answering YES to this question means an incorporation, although IncorpNation recommends you check with an accountant or tax advisor for any tax-related decisions.

11. Which employee benefits would you like to offer? (select all that apply)

C-Corporations tend to be a good structure if you are offering many employee benefits, like tax relief, although IncorpNation recommends you check with an accountant or tax advisor for any tax-related decisions.

Your Company’s Future

12. Do you want to minimize ongoing recordkeeping requirements?

There are specific recordkeeping requirements in order to maintain limited liability protection or corporations. These may include, but not be limited to annual meetings and documenting decisions of directors and shareholders. Other business types do not face these requirements.

13. What are your long-term business goals? (select all that apply)

Often your exit strategy will steer the decision of how to structure your business. For example, wanting to sell your business at a profit would rule out partnership. Or a desire to be publicly traded would mean C-Corporation.

Based on your answers, LLC may be best.

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Advantages of a Limited Liability Company

  • Owners (members) are typically not personally responsible for business debts and liabilities.
  • LLCs allow for pass-through taxation.
  • There are no restrictions on number of owners or who can be owners.
  • Owners have flexibility in structuring company management.
Get Started with an LLC

Advantages of an S Corporation

  • Owners (shareholders) are typically not personally responsible for business debts and liabilities.
  • S corporations allow for pass-through taxation.
  • S corporations may have self-employment tax savings over LLCs.
  • Capital can be more easily raised through sale of stock (as long as IRS guidelines are met).
Get Started with an S Corp

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