Running a business for profit has its inherent benefits and risks. The benefit of course is the profit you expect to earn from the business. In large corporations fringe benefits are also a factor to running a business. The inherent risks are many. The business owner may borrow money for long term investment or working capital requirements. Have creditors in the form of suppliers or services providers, employ people, supply products or services etc. All these activities generate potential liabilities for a business owner. That is why a C Corporation is advisable for running a substantial business. In a C Corporation, the business owners, generally known as share holders contract no personal liability for the corporation’s business activities and obligations.
Choosing a legal structure for your business depends upon the type of activity you do. A C Corp is not an easy structure to form and maintain. There are considerable expenses and formalities involved in forming a C Corporation and running it. The corporation has to be registered with the domicile state agency and pay considerable fees for filing its application and other relevant documents. An Articles of Incorporation and Bye Laws have to be drawn up. You may adopt a corporate seal, but in many states it is not a mandatory provision.
If your business does not involve transactions that have potential for future liabilities, you may opt to run as a sole proprietorship or if two or more individuals are involved, as a partnership. Both forms of business structure do not require any formal procedures to set up and conduct business. The income tax return for profit or loss from business is filed along with the sole proprietor’s or partner’s annual return filings. No taxes need be paid by the business itself. For small business operators, Limited Liability Company is a good option where the business owners or members can limit their personal liability for business debts obligations.
In a C Corporation, the business has its own legal entity that is separate from the share holders. Statute treats a C Corporation as an independent entity. The corporation can enter into a contract or obligate itself without personally obligating any of its share holders or office bearers. The C Corporation is the only business structure that does not have a pass through tax structure. The corporation has to file yearly tax returns separately from that of its shareholders. Share holders have to report any profit distributed by the C Corporation in their personal income tax returns.
The technical LLC definition is a limited liability company, but many people often refer to it as a limited liability corporation. Referring to an LLC as a limited liability corporation is wrong because corporations are a separate form of business that offers their own types of protection to the shareholders. The LLC definition uses the term company because businesses that are LLCs are not incorporated; they are simply a small business.
A limited liability company differs from a c corporation in many respects. One of the main differences between a LLC and a c corporation is stock certificates. Corporations can issue stock certificates to their shareholders because corporations are owned by shareholders. An LLC is owned by members and not shareholders so they do not have a need for issuing stock certificates. By the LLC definition, a LLC cannot go public like a c corporation can. A c corporation can have private shareholders, but it can also choose to take the corporation public later. If you wish to take an LLC public, you will need to form a corporation once you have decided to go public.
A LLC also differs from a sole proprietorship because it offers certain protections that a sole proprietorship cannot. For example, an LLC member is protected from any business debts or liabilities that are incurred during the course of business, unless a personal guarantee has been signed. If your business is considered a sole proprietorship, you will be personally responsible for any business debts and liabilities that are incurred during the course of business. If you have a sole proprietorship, your personal assets can be seized, such as your car or house, to help settle any business debts and liabilities that your business owes. A business partnership also varies from an LLC in the same manner.
Despite its differences with a c corporation and a business partnership, the best way to describe an LLC is a combination of the two types of business structures. The reason for this is that an LLC combines the advantages of a partnership and a c corporation together. By combining the advantages from each business structure, you get the best of both worlds because your business has the protection that is provided to corporations, but is less formal and more flexible than a corporation is. An LLC does not require you to have any bylaws nor does it require you to have meetings. An LLC does not need to have an operating agreement, which is similar to the bylaws of a corporation; it is still a good idea to have one in place.
Part of the LLC definition is the taxation of the LLC. According to the IRS, the LLC is not a valid business structure; it is not recognized by the IRS for federal tax purposes. If you choose an LLC for your business structure, you will need to classify your LLC as a corporation, partnership, or a sole proprietorship for federal income tax purposes. With an LLC, you are receiving a tax advantage because you are choosing how your business is going to be taxed, unless your LLC is automatically classified as a corporation under the IRS guidelines. Most LLCs choose to be taxed as a business partnership or a sole proprietorship because that allows for pass-through taxation and allows you to avoid the double taxation faced by corporations, unless you classify your LLC as an S corporation.
