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maximize your potential profitability by selecting the right business entity

Maximize Your Potential Profitability By Selecting The Right Business Entity

Choosing the right corporate entity is one key to a successful business start-up. The right entity type will positively impact a business from an operational, tax and financial standpoint. A brief meeting with a CPA and business attorney can ensure the entity is structured correctly from the start.  As a company grows it can convert to a new entity type when it makes sense. In other words, entrepreneurial ventures can grow into a more sophisticated corporate entity as it matures.

The following are common corporate entity types and highlights unique aspects between each:

C Corporations 

C-Corps are independent legal and tax entities separate from their owners, aka the corporate veil. This helps separate the shareholders’ personal assets from the business debts. There are no limits to the number of shareholders. C-Corps are taxed on corporate profits and shareholder dividends. A c-corp must hold annual board of director and shareholder meetings. At these meetings minutes must be kept and recorded. C-corps are managed by a board of directors, who then appoint a chief executive officer who then manages the company. Board of directors in turn are elected, or removed, by shareholders at the annual shareholder meeting. The corporate document governing how the c-corp operates is called “bylaws.” C-corps issue stock to the shareholders. Multiple classes of shares may be issued.

Limited Liability Companies (LLCs) 

LLCs are also independent legal entities separate from their owners, aka the corporate veil. This helps separate the owners’ personal assets from the business debts. The IRS considers LLCs to be “pass through” entities. In other words, an LLC is taxed similarly to a sole proprietorship (if one owner) or a partnership (if multiple owners). There are no limits to the number of owners in an LLC. LLCs, may, but are not required to hold annual meetings or record minutes. The corporate document governing how the LLC operates is called an “operating agreement.” The owners of an LLC may manage the LLC, or appoint a third party to be a manager. LLCs can elect to be taxed as an s-corporation by submitting IRS Form 2553.

Partnerships 

Partners in a partnership remain personally liable for lawsuits filed against the business, including the liability for the actions of other partners. This level of joint and several liabilities for another person’s actions should be weighed soberly before venturing into a partnership. While partnerships may be registered, usually no state filing is required to form a partnership. Partnerships between two or more individuals can also be legally inferred based upon actions demonstrating an intent to form a partnership. Partnerships are informal and easy to form and operate. Partners report their share of profit and loss in the partnership on their personal tax returns.

S Corporations 

S-Corps are independent legal and tax entities separate from their shareholders, aka the corporate veil. This helps to separate the shareholders’ personal assets from the business debts. Unlike c-corps, shareholders report their share of profit and loss in the company on their personal tax returns. The number of shareholders permitted in an s-corp is limited to 100 or less. Shareholders of an s-corp must be U.S. citizens or residents. An s-corp must hold annual board of director and shareholder meetings. At these meetings, minutes must be kept and recorded. S-corps are managed by a board of directors, who then appoint a chief executive officer who then manages the company. Board of directors, in turn, are elected, or removed, by shareholders at the annual shareholder meeting. The corporate document governing how the s-corp operates is called “bylaws.” S-corps issue stock to the shareholders. S-corps may only issue a single class of stock.

Sole Proprietorships 

Sole proprietor owners remain personally liable for lawsuits filed against the business. This level of personal liability should be given sober thought before venturing into a partnership. While a sole proprietor can be registered, usually no state filing is required to form a sole proprietorship. Sole proprietorships are easy to form and operate. Owners report business profits and losses on their personal tax return.

Johnstun Law can help you with all your business needs. Learn more about what we can do for your business here.

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