Image by: Rupert Ganzer
By Charles Lewis
There are a lot of big decisions to be made when starting a new business venture. One of the biggest is what legal form your start-up will be taking – you know, the type of company or corporation you’ll be forming.
Are you going small-time and sticking with the sole proprietorship model? Or are you going big and forming an LLC, C-Corporation or S-Corporation?
Each has its distinct advantages and disadvantages as you will see below.
This option is really designed for the “accidental” entrepreneur and those looking to sell a few things or try their hand at business, albeit dangerously.
Sure, that sole proprietorship (or other non-corporate business type) is easy to set-up and cheap as they come, but it will not ultimately get you where you need to go if you have your sites set higher than a swap meet.
As an individual running an SP, you would have no protection from creditors or liabilities, which can cost you … everything. Also, no investor or serious business type will give you the time of day unless you have a proper company foundation. And guess what? An SP does not offer a giant slab on concrete on which to firmly support your business.
DOWNSIDES: Too many to mention. Avoid at all costs, unless you are selling flowers out of the back of a van on the side of the road.
The mighty C is a complicated beast for sure, but investors ask for it by name. First off, by incorporating, you are offering yourself protection from the above-mentioned possibility of personal ruin should your venture fail.
There are also many tax advantages, although other incorporation types offer better flexibility in this area. One of the more popular moves is that you can pay half of your taxes in your corporation at a lower tax rate, and then pay yourself a salary that would be lower than if you got it all at once.
So, in essence, you end up paying two lower tax rates. Pretty cool. You can also deduct health insurance with a C-Corp, which is nice.
A note to all who are thinking of taking this adventure all the way to Silicon Valley – those guys and girls prefer you to have a C-Corp set up in the state of Delaware. Why Delaware? Please read our previous article “3 Stellar States To Start That New Business In” for more info in this area.
DOWNSIDES: Complicated taxes, formalities like corporate minutes, payroll taxes.
Image by: Steve Gasser
The S-Corp is for those who want to have the same protection as a C-Corporation but want to handle the taxes differently. In particular, S-Corps do not pay taxes, instead they file an “informational” return.
S-Corp taxes are handled and paid instead by the owner, through personal returns.
Other advantages gained by using an S-Corp: The corporation does not die with the owner. Statistically, S-Corps are not hassled by the IRS as much as, say, a sole proprietorship. Also, those expenses racked up in the name of your business may be deductible.
There are also some savings to be had in the area of self-employment taxes.
DOWNSIDE: Limited to 100 shares.
Limited Liability Corporation (LLC)
Then there’s the LLC. It’s simpler, but often forgotten. As with C- and S-Corporations, an LLCs individual owners – or shareholders – are usually protected from any liabilities or debts that the company may rack up.
LLCs are also great due to the fact that there are few, if any, restrictions on ownership in addition to management of the company.
Get this: no taxes! That’s right, there are no tax bills at the corporate level, as all taxes are handled by the owners and managers individually. Add to that very little in the way of paperwork and much less in the way of official meetings and other legal hoops and you have a pretty strong upside.
DOWNSIDE: LLC’s individual tax rate can be higher than if you had a C-Corp.