No matter the size of a business, large or small, local or national, all businesses must first legally establish themselves as a company and formally choose an incorporation type.
There are several different types of companies to choose from, and like most things, the one you choose will come down to your specific needs and the requirements you do or don’t meet.
Choosing how you structure your company mostly comes down to taxes. Each type of company is taxed differently and receives different tax breaks and deductions. However, taxes aren’t the only reason you need to concern yourself with how you structure your company. In addition to taxes, there are many benefits to incorporating your business.
Keep reading to learn about the various different types of incorporation and the various benefits, tax breaks, and requirements by law each incorporation type is held to.
S corporations are for those corporations who opt to have the companies income, losses, deductions, and credits pass through the company to the individual shareholders. These would be reported on their personal tax returns and have the taxes assessed at their individual income tax rates.
This helps S corporations to avoid the company income being double taxed. Choosing to structure your company as an S corporation also includes:
- Flexibility to set salaries for employees and owners
- If the company does not have inventory S corporations are not required to use the accrual accounting method.
- Less of a chance of an audit by the IRS
With an S corporation, shareholders will be able to claim initial startup costs as deductions on their personal tax returns as opposed to filing it as a loss on the company tax return.
In a C corporation structure, the shareholders and owners are taxed separately from the company. Also with a C corporation, the company income is taxed both at the company level and at the personal level. This is the double taxation situation that the S corporation allows businesses to avoid.
This double taxation occurs because the company is required to pay taxes on earnings before paying out dividends to shareholders. Since shareholders must claim these dividends as income on their tax returns they are taxed again, this time at the personal level.
While this can be disadvantageous it does allow the shareholders to reinvest profits back into the company at a lower corporate tax rate.
One of the many benefits of the C corporation structure is that the shareholders, owners, and managers are separate from the company, this means that they cannot be held personally liable for something the company did. This also means that the company will continue to exist even as managers, owners, and shareholders change.
Limited Liability Company (LLC)
A limited liability company is a company that limits the liability of the individual shareholders, owners, and managers. However, for taxes LLC companies have the option of filing as a corporation or not. LLC are similar to S corporations because the company’s income, losses, deductions, and credits are reported on the shareholders’ personal tax return.
An LLC protects the owners’ personal assets from being seized due to company losses. Since it only takes one owner to form an LLC it is a popular choice among sole-proprietors who are worried about their personal assets.
It provides the best of both worlds between a corporation and a sole proprietorship. An LLC receives the same tax benefits as a sole proprietorship (pass-through taxation) and the liability protection offered by corporations.
Doing Business As (DBA)
a DBA is used by companies who wish to incorporate but want to change the name originally filed. The company still keeps its original name for taxes and legal reasons but will be allowed to do business as whatever they chose.
For example, a company may have registered their name as William Williams Inc but may want to change the name to something more descriptive of the company. For example, the owners may open a public office for customers under the name Williams Heating and Plumbing. This way people know what they do and how to find them.
However, there is no protection offered with a DBA. DBA is always brought up with incorporation types and is often misrepresented. DBA only allows a business to change the name they will be doing business as. Nothing more.
What Incorporation Type Is Your Business?
Choosing what incorporation type for your business is a big step and should be done with great care and consideration. After all, you don’t want to pay more in taxes than necessary, you don’t want your personal assets to be at risk should your company fail, and you don’t want to be held liable for what the company does.
Knowing what it means to incorporate your business and the various different types S corporation, C corporation, LLC, and even what a DBA is. The big takeaways from incorporating are the protections it provides the shareholders from being held liable for what the company does.
Remember, though, DBA is only meant to change the name you will be doing business as. It does not provide any liability protection for the shareholders against anything the company does.
Most of the difference between the types comes down to taxes and how you wish to be taxed. LLC and S corporations both allow the shareholders to file company income on their personal returns and avoid double taxation. Whereas C corporations are double taxed on income.
If you have questions or concerns about incorporating your business or are wondering if you have structured your company the correct way contact us today!