Incorporation Lawyers Explain Incorporated Business Structures
Incorporation lawyers may be able to help companies incorporate into Limited Liability companies as well as C and S Corporations. Incorporation is a process that grants solid liability protection, flexibility of management, and various tax advantages, including the ability to determine how your business is taxed. For the purpose of this article, incorporation will refer solely to the formation of a distinct separate business entity. In other cases, the term may refer solely to the formation of a corporation.
Types of Business Structures
Significant progress has been made over the past few decades when it comes to the options available to legal business structures. Corporation and partnership were previously the only two directions a business could take. The Sub Chapter S portion of IRS code imposed several restrictions on corporations, such as limiting the number and type of shareholders they can have. A Limited Liability Company or LLC is the newest type of incorporated business, which offers liability protection for both owners as well as a favorable pass through taxation. Limited Liability Company Incorporation and the formation of an LLC may provide protection for business owners, but they can be costly. At one point, both the corporate entity and the owners paid income tax, a process known as double taxation. This meant that a sole proprietor status was the only way to avoid double taxation, but this status does not afford the same liability protections as an incorporated structure. Even S. Corporations do not provide equal liability protection. For this reason, the limited liability company was started in Wyoming in 1977.
The LLC is a separate legal entity that offers liability protection to both owners. An LLC offers both flexible taxation and liability protection, bridging the gap between corporations and partnerships. Incorporation lawyers may advise you on the best choices to make with regard to your LLC’s flexible taxation status. In an LLC, you can choose your own management structure that allows members to operate the business. You may also choose a standard corporation management structure, known as a “manager managed” structure. The flexibility of an LLC means that it can be run as a basic partnership or a more complex corporate structure similar to a board of directors. There are still many benefits to choosing a corporation over an LLC, however. Corporations have been tested extensively in court to provide protection from liability and debts. Raising capital with a corporation is also a much more straightforward process than it is with an LLC. LLCs have been much less rigorously tested in court, which means that corporations are more reliably able to shield the assets of owners in court. Incorporation lawyers may be able to advise you on whether an LLC or classic corporation is right for your business.
The Incorporation Process
Forming a limited liability company is similar in process to the formation of a standard corporation. You must first draft Articles of Formation, similar to Articles of Incorporation. These documents are very similar, and you file them both with the Secretary of State where you are incorporating. LLC’s offer less operational formalities than formal corporations. All corporations are required to hold shareholder meetings and keep minutes on those meetings on a minimum annual basis. Limited liability companies do not have mandated requirements to keep meeting minutes, although incorporation lawyers may recommend this practice to further distance the incorporated entity and the business owners.
Corporations are the oldest of all modern business structures, offering solid liability protection, ease of transferability, simplicity of capital raising, and perpetual duration. After incorporation, your business is a distinct entity, or “person.” This entity is separate from you and others who comprise it. The place where the business was incorporated is usually known as its resident domicile. If the business operates principally in another state, then it has a commercial domicile as well. Corporations have been the favored choice for liability protection for a long time. In the rare cases in which shareholder’s assets are used to fulfill corporate obligations, fraudulent activity is typically involved. A corporation that has properly been established and maintained provides maximum liability protection for its owners. Incorporation lawyers may be able to help you analyze whether your corporate structure is in accordance with taxation guidelines. The two major types of corporation are the standard C corporation and the IRS classification S corporation.
The S corporation is a specific tax classification given to the incorporated entity for pass-through taxation. Pass-through taxation means that the S corporation is not taxable, and the income and losses are reported on your personal tax return. An S corporation also limits the number of shareholders allowed, as well as the classes of stock.
There are additional types of corporations, such as Professional Service corporations and Close corporations. Both types are still incorporated structures and begin as C corporations. Close corporations are typically small and have very few shareholders. Some states allow Close corporations to operate with fewer formalities, reducing the maintenance involved with a corporation. Other states require certain classes of professionals, such as doctors, to incorporate a Professional Service corporation. All corporations are responsible for paying taxes on income. Shareholders of a corporation also pay taxes on their income and dividends, which constitutes double taxation. Full Sub Chapter S Election was introduced by the IRS to solve this problem.
Incorporated vs. Non-Incorporated
Since LLCs offer significant flexibility and liability protection as well as tax classification options, you may wonder why you wouldn’t incorporate. Most states allow for single-member LLCs, which offers the same benefits as a sole proprietorship while adding additional members is similar to a traditional partnership. In states that do not allow single-member LLC’s, you may bring a family member or another trusted person into the company on the agreement that only the proprietor will make top-down decisions for the business. You may also incorporate in a state that does allow single-member LLCs and enlist the assistance of incorporation lawyers to qualify for status as a foreign entity in your state. Since LLCs have very few operating formalities, non-incorporated businesses may be determined obsolete.
Contact Incorporation Lawyers
Filing for status as a corporation has numerous benefits, but the process can often be confusing. Contact the Sutton Law Center today at (775) 824-0300 for more information on forming your Limited Liability Corporation. Incorporation lawyers may be able to facilitate the process of incorporation and help you understand the benefits of each type of corporation.