One of the first decisions you have to make after you've come up with your business idea, is decide which legal structure your company will be. We will break down three: S-Corporations, Limited Liability Companies and C-Corporations. While all three are similar they differ in a few fundamental ways.
After your corporation is formed, you can select "S-Corporation Status". The filing process begins with adopting a resolution and submitting a form to the IRS (Internal Revenue Service). After filing is complete the corporation is taxed like a partnership or sole proprietorship, compared to a corporation. The income is then passed through to the shareholders for computing tax returns.
The vast majority of new small corporations choose S-Corporation Status (Over 90%) so their profits and losses can be included in the shareholders' (owner's) personal tax returns on profits once, then a second time when they are given back to shareholders as income. This concept is known as double taxation" and is the reason why S-corporations were formed.
S-Corporations do have limitations: They cannot deduct expenses like health insurance, entertainment, travel, etc. that other corporations can. S-Corporations are also limited to 100 shareholders or less. All of these shareholders must be American citizens. S-Corporations also may not own or be owned by other business entities.
Regular Corporation (C-Corporation, INC)
A corporation is a legal entity that can shield owners from personal liability and company debt. Since it is a separate entity it can purchase real estate, enter contacts, sue and be sued separately from its owners. Money can be raised via the sale of stock and ownership can be transferred via the transfer of the stock. The business can also continue regardless of who ownership after the transfer. The tax benefits can be considerable through deductions of business expenses, healthcare programs, etc. Income is reported separately via tax return for the corporation.
In many cases, during the startup process, you will own 100% of the stock and elect the directors, treasurer, CEO and Secretary.
Corporate Bylaws govern operating procedure for your corporation. This document establishes the rules for the company and can be changed as the business changes and grows. Operating a corporation requires at the minimum holding a yearly shareholders and directors meeting. The meetings are tax deductible and major decisions are kept in written record maintaining general corporate compliance as set by the Corporate Bylaws.
LLC (Limited Liability Company)
A limited Liability company is a hybrid between a corporation and partnership. LLC's provide Easy management, and pass-through taxation similar to a partnership with the liability protection of a corporation. Like a corporation it is a separate legal entity but there is no stock. The owners are referred to as "Members", not shareholders. It is like a corporation but with less complicated taxation and stock formalities.
At the core of a Limited Liability Company is the "Operating Agreement". This document establishes the rules for the company and can be changed as the business grows and changes. Operating an LLC is less formal than operating a corporation and usually only requires an Annual Members' meeting and those same members agreeing to changes of the Operating agreement and other important company decisions.
Form4Free can help
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