Suggestions on How to Reorganize Your Corporate Structure
One of the main considerations when forming a business involves which corporate structure to adopt. Important factors in this decision include the number of individuals involved, the volume of your earnings, the vulnerability of your assets, your long-term company goals, and how the business is to be taxed. Here are descriptions of the main options to help you decide which corporate structure is the right one for your situation.
As the name implies, a sole proprietorship is a single individual in an unincorporated business. This is the simplest form of corporate structure. You don’t need an employer identification number, or EIN, and you can use your Form 1040, schedule C, to report your business income and expenses. You have to pay estimated taxes quarterly, including 15.3 percent self-employment tax on the normal net income from your business. Because the business is not a separate entity, you are personally responsible for any liabilities.
Limited Liability Company
A Limited Liability Company, or LLC, can consist of an individual or a number of owners. The ability of an LLC to protect the personal assets of its members from creditors is one of its main advantages. It’s fairly easy to set up. You register the unique name, file articles of organization, compose an operating agreement, and obtain an EIN. LLCs are usually pass-through entities, which means that members receive income and are taxed as individuals, so you still have to pay the 15.3 percent self-employment tax on your ordinary net income.
S Corporations are limited to no more than 100 shareholders and a single class of stock. Their main advantages include protection of their officers and shareholders from responsibility for corporate debt and other liabilities, and relief from excessive taxation. As a business owner in an S Corporation, you save on self-employment tax because you are only taxed on your salary and not on the entire flow-through income of the business.
C Corporations are complex corporate structures that can have an unlimited amount of investors and a variety of stock options. They are also subject to double taxation, both to the business and to their shareholders, and so they are seldom the option of small business owners.
For more advice on corporate structure, contact Diamond Commercial Group.