Which Business Structure is Right For You?

Recently I discussed the serious matter of liability in business and how even freelancers and small businesses should consider incorporating in order to separate their personal finances from their business.

For most new entrepreneurs, the process of incorporating (or forming an LLC) is an unfamiliar road to navigate. And let?s face it, when you?re burning the candle at both ends to meet your clients? crazy deadlines or launch a website, legal paperwork isn?t necessarily high on your priority list.

Here?s a quick primer on incorporating in the U.S. to help you decide what?s best for your business:

Pick a business structure

Choosing your business? legal structure is a critical decision as it can impact the taxes you pay, your ability to raise capital, as well as the amount of paperwork you?ll have to contend with. The three most popular business structures in the U.S. are the LLC (Limited Liability Company), S Corporation and C Corporation. Here are some basic definitions:

• LLC: Form an LLC if you want legal protection, but minimal formality ? i.e. no exhaustive meeting minutes or addendum filings. It?s also the perfect structure for a start-up who will have foreign owners. An LLC?s main benefit, as the name suggests, is to limit the liability of the owners (separating your personal property from company property). An LLC does not file separate taxes; all company profits are passed through to the owners and reported on their personal tax returns.
• C Corporation: In the majority of cases, a C Corporation is overkill for the small business or freelancer. Operating as a C Corp requires a good deal of legal paperwork and formalities. In addition, a Corp is taxed separately and the company must file its own tax returns. This can lead to the problem of ?double taxation? where both the company and the company owners must file and pay taxes. However, a C Corporation should be used for those businesses that plan to reinvest their profits back into the company, seek venture capital funding, or go public.
  
• S Corporation: An S Corporation actually starts off as a C-Corp and then soon after incorporation, the owners submit paperwork to the IRS to be treated as a pass-through entity. This means that like the LLC, an S Corporation does not file its own taxes. An S Corporation is great for a small business owner who can qualify: The IRS places limits both on the number of owners and on who can be an owner in an S Corporation.

Pick your state of incorporation

Delaware and Nevada are both popular states for incorporation in the U.S. Delaware offers some of the most flexible, pro-business statutes in the country and Nevada offers low filing fees, as well as the lack of state corporate income, franchise, and personal income taxes. However, as a general rule of thumb, if your business will have fewer than 5 shareholders, it?s best to just incorporate in the state where you actually live or have a physical presence. Otherwise, all the added fees and paperwork created by ?operating out of state? just aren?t worth it.

How to incorporate or form an LLC

The process to incorporate or form an LLC is relatively easy these days. There are three common methods and each has its own set of pros and cons depending on your specific situation.

• Do-it-yourself: With this method, you?ll need to get the forms from your secretary of state?s office and submit them on your own. DIY is obviously the lowest cost method (you?ll still have to pay the state filing fee; exact fee amounts vary by state; for example, in California it?s $115 for a Corporation and $85 for an LLC). If you?re more concerned about saving money than time, and have a high tolerance for following the tiniest of details, this is a good option for you.

• Online legal filing service: An online legal filing service will file the documentation for you. This option is slightly more expensive than filing yourself. Yet for some, the time savings and peace of mind are invaluable. Legal documents are tedious and full of details (right down to what paper size a particular state requires!). A professional online service will know exactly what is needed to make sure the application is filed right the first time.

• Attorney: If you have particularly complex business needs ? for example you have strict requirements for shareholder structure or stock allocation, or you?re dealing with millions of dollars up front ? you should retain your own expert counsel to help get you started. Hiring an attorney is the most expensive option, but in some situations, the expert advice is called for.

When to incorporate

As for timing, since the main benefit of incorporation is liability protection, the sooner you incorporate or form an LLC, the better. There?s simply no reason to wait and potentially expose yourself to any more liability.

The act of incorporation or LLC formation won?t break the bank, particularly if you use an online legal filing service or file the forms yourself. Whatever method you choose, know that you?re taking an important step for your business and your finances.

About the author: Nellie Akalp is the CEO of?CorpNet.com,?an online incorporation filing service, where she helps entrepreneurs?Incorporate,?Form an LLC? or set up?Sole Proprietorships(DBAs)?for their new businesses.

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Source: http://prsync.com/freshbooks/which-business-structure-is-right-for-you-502421/

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