Company Incorporation

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Company Incorporation:

Starting a new business requires making a series of key financial decisions that can affect the profitability of your business down the road. Navigating the path to success is much easier when you have access to dependable financial guidance from an accounting professional. As your trusted business advisor, we can help get your business off to the right start.

The way you incorporate can have strong financial repercussions. Selecting the right structure can contribute to your success but selecting the wrong one can end up costing you a lot of money. We understands the advantages and disadvantages of each type of entity and how to determine which one is right for a business of your size in your industry. We’ll work with you to identify the entity that will help your business minimize its tax burden and maximize profits in the years to come.

C-Corporation:

A C Corporation brings your business greater credibility and growth potential. It differs from S Corporations and LLCs in taxation, ownership, and the ability to raise capital through stock.

S-Corporation:

S Corporations are for those who think big but want to keep things small. Pass-through taxation combined with the ability to structure compensation means you enjoy credibility and protections without being subject to the same tax rules as mega-corporations.

Self-employment tax savings. An S corps can offer self-employment tax savings, since owners who work for the business are classified as employees.

Llc:

LLCs are easy to form, simple to maintain, and can scale as your business grows. LLCs combine the flexibility of a partnership with the liability protection enjoyed by corporations and allow you to avoid double taxation.

Corporations, most LLCs, and all businesses with employees must have this IRS-issued identifier.

The IRS generally requires the following types of businesses to obtain an EIN:

  • All corporations
  • All Limited Liability Companies (LLCs) with more than one member
  • Any business that hires employees, including sole proprietorships and single-member LLCs

Many nonprofit organizations, as well as trusts and certain co-ops, must also have an EIN. If a business has changed its formation type or emerged from bankruptcy, it is typically required to apply for a new Employer Identification Number (EIN).

For many business owners, obtaining an EIN is one of the first things they do after incorporating or forming an LLC. Along with tax filings, businesses often need an EIN in order to:

  • Open business checking accounts
  • Establish accounts with certain vendors

Sometimes you'll see the Employer Identification Number referred to as a Federal Tax Identification Number (TIN) or a Federal Employer Identification Number (FEIN). As a general rule, it's good for all businesses, with the exception of sole proprietorships without employees, to have an EIN.

How to Form an LLC (Limited Liability Company)

  1. Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do).
  2. Draft and file your Articles of Incorporation with your Secretary of State.
  3. Decide who will run the business (managers or members)
  4. Decide how many owners are in the business
  5. Apply for a business license and other certificates specific to your industry.
  6. File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN).
  7. Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN.

What Is an S Corporation (S Corp)?

It's kind of like the lite version of a c corporation (c corp). An s corp offers investment opportunities, perpetual existence, and that coveted protection of limited liability. But, unlike a c corp, s corps only have to file taxes yearly and they are not subject to double taxation. Read on if this sounds enticing for your business.

S Corp Advantages

Read 'em and weep.

  • Limited liability. Company directors, officers, shareholders, and employees enjoy limited liability protection.
  • Pass-through taxation. Owners report their share of profit and loss on their individual tax returns.
  • Elimination of double taxation of income. Income is not taxed twice – once as corporate income and again as dividend income.
  • Investment opportunities. The company can attract investors through the sale of shares of stock.
  • Perpetual existence. The business continues to exist even if the owner leaves or dies.
  • Once-a-year tax filing requirement. Versus c corps, which must file quarterly.

S Corp Disadvantages

There's a lot to love, but here's a few things to consider before adding the 's' to your corp.

  • S. citizens and permanent residents only. Unlike the c corp and LLC (Limited Liability Company), you have to be a legal resident of the U.S.
  • Limited ownership. An s corp may not have more than 100 shareholders.
  • Formation and ongoing expenses. It is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation, obtain a registered agent for your company, and pay the appropriate fees. Many states also impose ongoing fees, such as annual report and/or franchise tax fees.
  • Tax qualification obligations. Mistakes regarding the various filing requirements can accidentally result in the termination of s corp status.
  • Closer IRS scrutiny. Payments to employees and shareholders could be distributed as either salaries or dividends. Each are taxed differently, which is what leads the IRS to scrutinize that distribution more closely.

S Corporation vs. C Corporation

What is an s corp?

As we described above, an s corp is something like the lite version of a c corp. That is, when you consider its growth potential and organizational structure.

Every business that files for corporation is first classified as a c corp. Once that's complete, you have to then file for subchapter s corp status and meet all requirements for an s corp – namely, have fewer than 100 shareholders who are all individuals, not corporations; have only one class of stock; and be owned by U.S. citizens or resident aliens. All of which are pretty easy requirements for most small businesses.

Back to the perk of saving money. An s corp is not subject to double taxation as a c corp is. That means that an s corp's revenue is not taxed at the corporate level. It's only taxed when paid out as salaries or dividends to shareholders. That alone could save an s corp hundreds of thousands of dollars. For this reason, a c corp makes very little sense for a small business. But if you opt for an s corp, make sure you have a solid accountant as one mistake in filing can send your company back to c corp status, leaving it open to be taxed twice.

Find out which corporation is right for your business with our Business Wizard!

How to Start and Form an S Corp

  1. Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do).
  2. Draft and file your Articles of Incorporation with your Secretary of State.
  3. Issue stock certificates to the initial shareholders.
  4. Apply for a business license and other certificates specific to your industry.
  5. File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN).
  6. Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN.
  7. File the IRS form 2553 within 75 days of your corporation formation.

What Is a C Corporation?

It's the most common type of corporation in the U.S. – and with good reason. C corporations (c corps) offer unlimited growth potential through the sale of stocks, which means you can attract some very wealthy investors. Plus, there is no limit to the number of shareholders a c corp can have.

Advantages of a C Corporation

There are many benefits of a c corp. Below are just a few that stand out.

  • Limited liability. This applies to directors, officers, shareholders, and employees.
  • Perpetual existence. Even if the owner leaves the company.
  • Enhanced credibility. Gain respect among suppliers and lenders.
  • Unlimited growth potential. The sky's the limit thanks to the sale of stock.
  • No shareholders limit. However, once the company has $10 million in assets and 500 shareholders, it is required to register with the SEC under the Securities Exchange Act of 1934.
  • Certain tax advantages. Enjoy tax-deductible business expenses.

Disadvantages of a C Corporation

Having unlimited growth comes with a few minor setbacks.

  • Double taxation. It's inevitable as revenue is taxed at the company level and again as shareholder dividends.
  • Expensive to start. There are a lot of fees that come with filing the Articles of Incorporation. And corporations pay fees to the state in which they operate.
  • Regulations and formalities. C corps experience more government oversight than other companies due to complex tax rules and the protection provided to owners from being responsible for debts, lawsuits, and other financial obligations.
  • No deduction of corporate losses. Unlike an s corporation (s corp), shareholders can't deduct losses on their personal tax returns.

C Corporation vs. S Corporation

Both c and s corps offer limited liability protection. Both require Articles of Incorporation to be filed. And both comprise shareholders, directors, and officers. There are lots of similarities, but they differ in the complex realm of taxation and corporate ownership.

As we mentioned above, c corps are subject to double taxation while s corps are pass-through tax entities, allowing them to avoid being taxed at the corporate level and again on shareholders' personal income taxes.

When it comes to corporate ownership, c corps have no restriction on ownership, which goes back to our point about them having unlimited growth potential. But s corps don't have that luxury as they're restricted to no more than 100 shareholders. Also, s corps cannot be owned by a c corp, other s corps, LLCs, partnerships, or many trusts. But a c corp has no limits on who or what can be a shareholder. Compare corporations and LLCs with our business comparison chart.

How to Form a C Corporation

  1. Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do).
  2. Draft and file your Articles of Incorporation with your Secretary of State.
  3. Issue stock certificates to the initial shareholders.
  4. Apply for a business license and other certificates specific to your industry.
  5. File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN).
  6. Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN.
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