Incorporation paperwork is a real important issue when launching a startup, stepping into entrepreneurship, or a being a new business owner, especially when looking for business funding.
You've got to get your paperwork started correctly. This may seem like a headache when you're just getting your business started, but it can save a lot of frustration later. Many startups begin with good intentions and end with in-fighting because the paperwork wasn't set up properly in the beginning.
Even if you don't have partners to fight with, you will have taxes to file. If your paperwork isn't in order, this could cut into your profits at tax time. Here's an overview of the three most common forms of business classification. All of these are easy to setup and create with helpful online services. Get your incorporation paperwork right from the start.
An S-Corporation, or S-Corp, is very similar to a standard corporation, or C-Corp. In both cases, the business is a separate entity from the owners. As such, the company will continue to exist after the current owners sell their shares or bequeath them after the owner's demise.
The biggest difference is that tax liability for an S-corp is passed to the owners of the corporation, unlike a C-corp with is taxed separately. This can make tax filing easier for new businesses by reducing the accounting required by the business. However, it may be advantageous to separate the company taxes from your personal taxes. Choosing between a C-corp and an S-corp is something you should discuss with your accountant.
When financial backers are looking for companies to invest in, they look for S-corporations and C-corporations first. These corporate structures make it easy to bring in new partners and build a transparent business for investors to analyze.
One of the easiest ways to separate your business from your personal finances while limiting your personal liability is with an LLC. This is a legal entity owned by a specified number of people. It is essentially a private partnership. An LLC has the same pass-through taxation as an S-corp and similarly limited liability for owners. However, there is much less overhead required to setup and manage an LLC. While corporations are owned by stockholders, LLC owners are each assigned some percentage of ownership during the LLC filing. There are a few types of businesses that cannot be set up as an LLC, but this situation is rare and varies from state to state.
For this reason it is important to check your state guidelines before creating an LLC. Also, you could set up your LLC in a different state to take advantage of options not offered by your state. Check with your attorney and accountant to decide which option is best for you.
The next best option for businesses that want to take on investors is an LLC. This allows owners to divide up the company based on ownership percentages. It's not as easy as assigning shares with an S-corp or C-corp, but it's much better than a sole proprietorship.
While no incorporation paperwork is required to set up a sole proprietorship, it's not always the best option. Running your business as a sole proprietorship means that all liability will be passed to you. This includes full legal and tax liability for the business.
Your personal assets could be taken to settle any debts owed by the business or any legal judgments against the business. Creating some form of corporation is the best way to protect your personal assets while you're creating and running your business. In most cases, this will limit your personal liability to only those assets assigned to the business. Here too, it's best to check with your attorney and accountant for details about your personal liability. However, there are few situations in which a sole proprietorship is advantageous.
When you're looking for investors, it's easy to create a similar structure to a sole proprietorship with an LLC. This offers some personal liability protection for you and your business partners. It also makes more business more attractive to potential investors.
Learn more about the business entity formation and the incorporation paperwork process with IncFile incorporation services.
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