Understanding Business Structures

Understanding Business Structures

Business owners may choose from a variety of company structures, based on their needs and preferences. Especially with the advent of the limited liability company (LLC), the choices for small-business owners are wider and better than before. More good news for small-business owners: As the needs of the company change, the existing business structure can be amended, or a new business structure can be formed quickly, easily, and affordably.

To get you started, here are some useful descriptions of the most popular business structures.

General Corporation

A general corporation, also known as a “C” corporation, is the most common corporate structure. A general corporation may have an unlimited number of stockholders. Consequently, it is the common choice for companies that will have more than 30 stockholders or large public stock offerings. Because a corporation is a separate legal entity, a stockholder’s personal liability is usually limited to the amount of investment in the corporation and no more.

Close Corporation

A close corporation is most appropriate for the individual starting a company alone or with a small number of people. Some significant differences exist between a general corporation and a close corporation. A close corporation allows for no more than 30 stockholders. In addition, many close-corporation statutes require that the directors of a close corporation must first offer the shares to existing stockholders before selling to new stockholders. Not all states recognize close corporations.

Subchapter S Corporation

A Subchapter S corporation is a general corporation that has a special IRS tax status, which was elected after the corporation was formed. Subchapter S corporations are most appropriate for small-business owners and entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners. When a general corporation makes a profit, a federal corporate income tax is due on the profit. If the company also declares a dividend, its stockholders must report their shares of the dividend as personal income and pay more taxes. S corporations avoid this “double taxation” (once at the corporate level and again at the personal level), because all income or loss is reported only once—on the personal tax returns of the stockholders. For many small businesses, the S corporation offers the best of both worlds, combining the tax advantages of a sole proprietorship or partnership with the limited liability and enduring life of a corporate structure.

Limited Liability Company (LLC)

The LLC is not a corporation, but it offers many of the same advantages. Many small-business owners and entrepreneurs prefer LLCs. These structures combine the limited liability protection of corporations with the “pass-through” taxation of sole proprietorships or partnerships. LLCs have additional advantages over corporations:

  • LLCs allow greater flexibility in management and business organization.
  • LLCs do not have the ownership restrictions of S corporations, making them ideal business structures for foreign investors.
  • LLCs accomplish these aims without the restrictions that the IRS places on S corporations.
  • LLCs are now available in every state and the District of Columbia. Guidelines for corporations and LLCs are set by each individual state, and they vary by state.

The Small Business Authority can help you with your incorporation needs. For more information, click here.

This article appears courtesy of The Company Corporation.® The Company Corporation® is a service company and does not provide legal or financial advice. For more information, visit Incorporate.com.

2011-07-05T04:15:55+00:00 July 5th, 2011|Blog, Incorporating Your Business, Starting Your Business, Uncategorized|Comments Off on Understanding Business Structures
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