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3 things to know about business formation and corporations

On Behalf of | Jun 10, 2022 | Business Formation |

Business leaders looking to incorporate need to consider various factors when making their decision. For some, a limited liability company (LLC) or partnership may make sense. For others, a corporation. But why and which one?

There are different types of corporate structures. Two of the more well-known are the S corp and C corp. The S corp is a good option for those who are in the top income tax bracket and looking for the benefits that come with use of a corporate entity. Common examples of businesses that can benefit with this form include private practices and certain consultant firms.

In contrast, the C corp is generally best for large companies that are planning to or have already gone public. Three things to know about corporations before making your decision include the following.

#1: Taxation

An S corp structure allows the business to take advantage of pass-through taxation. This means the corporation itself does not pay taxes. Instead, the tax obligations pass-through to the business owners.

The same is not true of a C corp. One of the disadvantages of a C corp is the likelihood of double taxation because the business pays taxes as a its own, separate entity and the business owners also pay taxes.

#2: Asset protection

The ability to separate the business owner’s personal assets from the business’ assets is a huge benefit when it comes to use of corporate structure. The corporate structure serves as a wall between the business owner and the business, essentially protecting the owners in the event the business is the subject of a lawsuit.

#3: Funding options

Sometimes the funds raised from simply doing business is not enough. When businesses need to raise capital, they need to look towards other options. Corporations can raise funding or capital using three primary options: debt capital, retained earnings, and equity capital. Debt capital is gathered through loans from lenders, retained earnings generally means shareholders expect payouts from future increased profits and equity capital is from external investors.

These are just a few of the considerations to discuss when deciding the right entity for your business’ needs. An attorney experienced in this area of the law can discuss the pros and cons of these and other options to help you find the right fit for your business.