Starting a small business is a bold new chapter. Yet, right from the start, you must choose the right legal structure for your business. This choice is very important. It affects your liability, tax obligations, and future business growth.
We have two primary types of business entities: limited liability companies (LLCs) and corporations.
Let’s break it down! What’s better for your small business, including some often-asked questions that are useful for the business structure.
Company vs. business. Understand this concept first:
Let’s clarify this common concept of “company and business.” So, if you have a food business of bakery items like cupcakes and doughnuts, this is your business. Business refers to a money-making activity.
A company is a legal structure. It helps protect your business’s stability by following government rules.
We have two types of business categories.
- Partnership Business
- Sole Proprietorship
Example of Sole Proprietorship: A business run by an individual, like a coffee shop, a local handyman, or a freelancer.
Example of Business Partnership: Two or more partners run a partnership business. They share the same profits. For example, two chefs might open a food cart or a restaurant together.
The Core Concept of LLCs and Corporations:
While starting your business, you need to choose between two common legal structures, LLCs and business corporations. Here is a brief look at each business entity:
What is an LLC?
An LLC, or limited liability company, offers both liability protection and operational flexibility.
A quick overview of LLC features:
Limited liability protection:
An LLC is easy to create but comes with limited liability. One of the main benefits of an LLC is that it provides personal liability/asset protection. This means your business or home is protected from business debts and obligations. This is an important advantage compared to sole proprietorships and personal partnerships, where owners often face unlimited liabilities.
Tax Flexibility: As a rule, LLCs are taxed, and they pass through the profits and losses of the owners on their tax returns.
Simple Management: LLCs generally have fewer requirements compared to corporations. They can be managed by their owners or an appointed manager and offer a less formal business structure.
LLC is popular with small business owners. It offers personal asset protection without the complicated rules of corporations. A limited liability company (LLC) offers tax flexibility. You can choose to be taxed as a sole proprietor, S-Corp, C-Corp, or partnership.
Partnership Advantages (Multi-Member LLCs)
Below are a few partnership advantages of multi-member LLCs:
- Your business partners will share your workload, as well as unique talents and knowledge.
- More individuals contributing money to the business means that your capital is increasing.
- Making decisions as a collaboration (team).
What is an S Corporation (S-Corp)?
An S Corporation is a special type of corporation where it is not required to pay corporate income tax. A shareholder is the owner of a corporation.
A shareholder only pays tax once on the company’s profit (not for both as a company and as a shareholder).
Key features of S corporations include:
- Avoid double taxation on a company’s profits.
- Generally protected by general liability for company debts and regulations.
- The rule limits the number of shareholders to 100, and they must have U.S. residency.
- S-Corp owners can enjoy potential tax advantages. They can reduce self-employment tax by taking a reasonable salary and more income as distributions.
Can an LLC be an S Corp?
Yes, it is possible. An S-Corp is a tax classification. An LLC can be chosen to be taxed as an S-Corp. If your business meets the requirements for an S-Corp with the IRS (Internal Revenue Service).
What is a C corporation (C-Corp)?
A C-Corp is the most common type of business corporation. In a C-Corp, shareholders pay tax on the profit before distributing profits to the shareholders as dividends. After that, they must pay tax on their income. In short, there is double taxation on the same earnings.
Advantages of a Corporation:
S-Corp Advantages:
The following are certain advantages of S Corps:
- Saving tax by avoiding double taxation on your business profits.
- The main advantage that a business corporation has is the ability to attract significant investments; it raises business capital.
- A great way to protect personal assets.
Advantages of C Corporations:
- Enjoy a separate legal identity.
- Distinct roles for management and ownership.
- Protects against personal liability.
- Freedom to buy and sell ownership.
- Offers a wide range of strategies for tax liabilities.
- No restrictions on holding shares by an individual or entity.
- The investment community shows a strong preference for C corps.
- Offers a wide range of options for optimizing tax liabilities.
Choosing the Right Business Entity for Your Small Business in New York:
Above are the general guidelines for LLCs and corporations. Your actual situation and long-term goals will determine which entity type is the best fit for you. A business entity selection consultation is a crucial step. If you are already ready to set up a business, contact New York’s professional business advisors and tax professionals.
The trustworthy and experienced team of Tax King Inc. can help you with financial planning, business formation, and tax planning.
Let us guide you in navigating the complexities of business formation and taxation.
Find clarity for your business with Tax King Inc!
FAQ’s
Do LLCs have a board of directors?
No, an LLC provides flexibility in management. This is the main difference between LLC and corporation. All business members are involved in day to day operational decision making or the member chooses to manage the business.
What is the difference between an LLC or a business licence?
Forming an LLC will give your business a legal structure. You must need a professional business license and permit to legally operate your business.
A business license is a legal permit that allows you to operate your business in a specific state or region. You may need multiple licenses ( business license, health permit, sales tax permit) , it depends on your business type and requirements.
Is an LLC a business licence?
LLC is a business entity. It’s a formal structure you create by filing documents. The basic purpose of LLC is to provide personal liability protection by separating your personal assets from legal arguments and business debt.
What is a firm in business?
The term “firm” is used as a synonym of business, company or enterprise. It does not have a legal definition but generally refers to the business that provides professional services.
Example of where we use the term “Firm”
- Accounting Firm
- Law Firm
- Taxing Firm
- Consulting Firm
- Architecture Firm
