What Should Your Business Be?
Starting a new business is daunting. There are many decisions to make, including which business structure is most advantageous. Sole proprietorships and partnerships are chancy because these leave owners responsible for company debts, risking their personal assets if the business should fail. Incorporating is often a more logical solution.
Two of the most popular business structures are S corporations and LLCs, which both have the advantage of “pass through” taxation. That means that the company’s income is reported on the owner’s personal income tax and is taxed once, rather than twice, as it is with a C corporation or a standard corporation.
Pros and Cons of S Corporations
Like most things in life, S corps have pros and cons. The pros include avoiding double taxation and other tax advantages. You can also write off start up losses against your personal income taxes.
S corps do offer some liability protection of your personal assets, but be aware that many lenders are now demanding personal guarantees, so it is not a perfect safety net.
Other negatives include the ability to issue only one type of stock, your business is less attractive to investors, you are still required to hold corporate meetings and keep minutes, and the business must still file an annual tax return.
Some special requirements for S corps include:
* There may not be more than 75 shareholders
* All shareholders must be residents of the US
* You must be a domestic company in a state
* All shareholders must agree to form an S corporation
Pros and Cons of LLCs
LLCs are gaining popularity because they offer several benefits. These advantages include limited liability (unless the owner signed a personal guarantee), flexible profit distribution, no requirements to take minutes or resolutions, ease of operation, and pass through taxation.
Disadvantages include inability to take the company public by offering shares, a limited life span because the LLC will be dissolved if an owner files bankruptcy or dies, and there is more paperwork than with a partnership or sole proprietorship.
All 50 states now allow LLCs and there are only two main steps required: an operating agreement, which is advisable even if you are in one of the states that does not require it, and you must file articles of organization with the Secretary of State. If you live in the Boston area, it is advisable to discuss your options with a Boston law firm. Law firms in Boston will have the most current information on business structures in Massachusetts and can help you decide which business form will be best for your company.