Sub Chapter S Corporations
S Corporation is a business entity that elects to be taxed under subchapter S of Chapter 1 of Internal Revenue Code. Incorporating an S corporation entails the same formalities and procedures as that of a C Corporation under state statutes. Both corporations offer limited liability status to its shareholders. The key differences between a C Corporation and an S Corporation are in ownership and taxation. S Corporation ownership is restricted to resident citizens and natural persons. The total number of shareholders cannot be more that 100 in S Corporations and the shares can have only one class. The C Corporation has no such restrictions on ownership. In taxation, S Corporation has a pass-through taxation as in a Partnership. C Corporations have to pay corporate tax on its profits directly.
Limited Liability Company or LLC has the same limited liability status as that of corporations. It can also elect to be taxed as a pass-through entity as an S Corporation. LLC formation and operation does not involve as much formalities and procedures as in a Corporation. In LLC Vs S Corp, the ownership restrictions and formalities of an S Corporation is not present in LLC. Membership in LLC can be owned by any entity or person and the formation of an LLC is comparatively uncomplicated. The transfer of ownership in LLC can be unrestrained as that of a Corporation if so constituted in its Articles or Operating Agreement.
As how to incorporate yourself, you have to refer to your state’s statutes governing business registration and incorporation. Online resources are available in most states for the formation and incorporation of your business. The best way is to confer with the state agency handling business registrations and incorporation. Generally it is the Secretary of State’s or Corporation Commissioner’s offices. In some states Department of Revenue deals with business registration and conduct.
Some basic requirements in how to incorporate yourself are 1. Get a valid name for your corporation. 2. File Articles of Incorporation with your state and pay the due fees. 3. Appoint a resident agent. 4. Hold a board of directors meeting and adopt bylaws of the corporation. These are only general directions, to have a complete picture on how to incorporate yourself consult a lawyer or a professional incorporator. There are many more formalities involved such as appointing directors and officers, opening and maintaining minute book to record minutes of meeting, issuing stock certificates, obtaining business permits and licenses etc.
Should I Change From a Sole Proprietorship
It doesn’t take much to set up a sole proprietorship. Realistically all you have to do is get a business license, a DBA and boom, you are in business. You file your sole proprietorship taxes with your personal taxes so that’s easy. You can use your personal social security number so you aren’t required to get an EIN. There are several disadvantages of this entity type and in my opinion, there are enough disadvantages that it would be wise if took the steps to file a different type of entity.
You can find hundreds of business articles on the topic of incorporating and setting up LLC s. You should actually take the time to read them and educate yourself on these subjects because this decision shouldn’t be taken lightly. It may seem intimidating at first to file the correct business forms but it doesn’t take too much time or that much money to properly form an entity that will save you in taxes and protect you from liability.
Incorporating your business gives you tax advantages and liability protection in the event that you get sued as a result of your business activities. Incorporating does take a lot of work to maintain but corporations definitely have their place in business. Annual records need to be maintained, meeting minutes, filing fees, officer lists, record books, etc. all need to be managed. There are plenty of service providers that can create your original business articles of incorporation as well as maintain your records so that you don’t lose the protection and benefits that a corporation affords.
Setting up LLC s is also a great way to get tax savings as well as liability protection. I personally prefer limited liability companies because I like to get creative with my business structuring and have one entity own another that owns another and so on. An LLC is able to own another LLC so it makes structuring multiple businesses easier. There are some ownership restrictions with corporations that aren’t applicable to LLC’s.
Filing out the proper business forms to file an LLC is actually not that difficult. You can find templates online or just call the secretary of state where your business operates and ask them for some direction. It’s really easy to switch from a sole proprietorship to an LLC or corporation and the benefits definitely out way the costs.
