Business Entity Formation
Are you forming a business but don’t know which entity to choose? The various business entities serve different purposes. Choosing the right one for your needs and goals is a big advantage when establishing your business.
Choosing the right entity for your business can maximize your tax benefits and provide protection from personal liability. Contact our business formation attorneys to learn more about how we can assist you.
The biggest mistake people make when forming a business is not choosing the entity that can meet their business needs. What works for one business may be a disadvantage to another, depending on the type of business, the number of employees, the potential tax liability and the need for pension and 401k plans.
We will explain the relative advantages and disadvantages of each entity structure, helping you choose the form that is best for your business, such as a:
- C-Corporation: A C-corporation is the standard corporate form. Unlike partnerships, corporations generally offer personal liability protection from business debts and liabilities,but must obey certain formalities.
- S-Corporation: An S-corporation is so-named because it is defined in Subchapter S of the Internal Revenue Code. S-corporations share almost all of the benefits of C-corporations, but are taxed similar to partnerships, in that the entity itself is not taxed on gains. However, S-corporations can only have up to 100 shareholders, all of which must be U.S. residents, among other restrictions.
- Limited Liability Company (LLC): A limited liability company is a business entity that operates under state law; every state has a statute authorizing LLCs. Generally, members of an LLC are protected from business debts, just as in a corporation. LLCs also allow businesses great flexibility in distributing profits and losses. While LLCs are typically taxed like partnerships, they can elect to be taxed as a corporation.
- Partnership: Partnerships are among the easiest business entity to form and manage, as they involve few or no structure or reporting requirements to exist. General partners in a partnership, however, are personally liable for the debts of the business. The partnership itself does not pay taxes on earnings, but individual partners must report their share of profits or losses.
- Non-Profit Corporations: Non-Profit Corporations are exempt from taxes under section 501(c)(3)of the Internal Revenue Code because they are formed for charitable purposes. There are two types of non-profit corporations: (1) public benefit, such as school or charity; and (2) mutual benefit, such as a club.
There are also several new corporate forms that are available in California and several other states in similar iterations, but not in every state where you may incorporate your business:
- Flexible Purpose Corporation (FPC): FPCs combine the for-profit abilities of a corporation with the social mindedness of a non-profit corporation. An FPC must specify at least one “special purpose” in its charter and the Board and management will be protected from shareholder liability when considering their special purpose against shareholder value.
- Benefit Corporation: Each Benefit Corporation must provide a general positive benefit and specifically, a material positive impact on society and the environment. This entity may also pursue a more specific public benefit alongside its general positive benefit. A Benefit Corporation will require a company to consider society, the environment and its shareholders when making decisions.
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