Should You Incorporate Your Small Business or Form an LLC?

Are you trying to determine which type of legal entity to form for your small business? There are plenty of options to choose from, but not all are suitable for every business. For example, some businesses are better off forming an LLC while others would do better as a corporation.

If you’re still researching to make your decision, the following tips can help.

  1. Consider the future of your business

When forming a legal business entity, consider the future of your business. For example, you’ll want to consider forming a C-Corporation if you plan on taking your business public or if you want to raise capital through investors. It’s also a good choice for high risk businesses. However, if you don’t foresee going public or your business liability isn’t high, you might be better off forming an LLC.

Just be sure to form the correct entity from the start. If you invest heavy capital in your marketing strategy like your website, infographics, and images that get shared on social media, you’ll regret having to change it later.

  1. Consider your industry

If your industry is high-risk, you’re better off forming a C-Corp to gain more protection. For example, doctors, lawyers, and psychiatry professionals are great candidates for a C-Corp due to the amount of liability in those industries.

High risk industries aside, the majority of businesses would do well as an LLC. An LLC isn’t limited to specific industries, as you can see in the list of business ideas published by IncFile, an LLC is perfect for a variety of industries including automotive, copywriting, accounting, and fitness trainers.

  1. Consider entity tax structures

While protecting your business should be at the forefront of your decisions, you can’t ignore the fact that entities are taxed differently. For instance, an LLC is a pass-through entity, which means the business itself isn’t taxed. Profits are passed through to LLC members and each member is responsible for reporting the income on his or her tax return. An LLC is the least restrictive entity in terms of taxes. Similarly, an S-Corp is also a pass-through entity and shareholders pay their own taxes.

A C-Corp is taxed twice – first as a business and then shareholders are taxed. This is commonly referred to as “double taxation.” Here’s how it works. C-Corp profits are taxed first before shareholders are paid dividends. Once shareholders are paid they’re taxed on the dividends they receive and must pay those taxes personally.

For a clear overview of how C-Corps and LLCs are taxed, this article from gusto provides a detailed breakdown with specific examples.

The other point to consider is your entity choice doesn’t necessarily have to be your tax entity. For instance, you can form a C-Corp. but elect to have the IRS tax you as an S-Corp. An LLC can choose to be taxed as a partnership, an S-Corp, or a C-Corp. It’s complicated, so before you make a final decision consult with an attorney.

  1. Consider entity upkeep and management

Once you form a business entity, you’ll be required to file certain forms, pay yearly fees, and maintain your organization to specific standards. The standards are different for each type of entity. For example, a C-Corp will require more of your time and money. You’ll need to form a governing body of officers including a president, vice president, secretary, and treasurer. You’ll also need a Board of Directors, by-laws, and regular meetings. Each year, you’ll need to file a report of all business dealings with the state.

To maintain a C-Corp, you’ll probably need legal counsel and a dedicated accountant. State laws that govern corporations are strict and you can’t afford to break the rules.

An LLC doesn’t have as many requirements. You’ll need to keep records of income, expenses, purchases, deductions, and assets. You’ll be required to maintain accurate records on employees and pay employee taxes. However, you don’t need a Board of Directors or a full body of governing officers.

Always consult an attorney before forming an entity

The process of forming an entity for your small business is complex and there are a multitude of variables that will affect you long-term. Consult with an attorney before making any concrete decisions. An experienced attorney will ask the right questions to figure out which entity will best support your business.

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