December 18th, 2012
In a prior post, we talked about starting up a side business as an additional money stream or as a way of changing careers. In today’s post, we’ll provide you with a list of resources on business structures and which one would be the best for you. As always, talk with your lawyer, insurance agent and tax advisor to understand how this will impact you and your finances.
A corporation is a more rigid structure and also had a lot more rules and regulations. You must have annual meetings and publish notes, you must keep the minutes with the articles of incorporation, and you must keep track of shares that you have issued.
How are S&C corporations similar?
The corporation provides the owners protection from some legal action. For example, if you created a cream that made people glow in the dark, people would sue the corporation, not you, the owner. This is considered “limited liability protection.”
S & C corporations are separate legal entities. The articles that they have to file are the same.
The structure is the same in that there are directors, officers, and shareholders. And both must follow the same internal and external formalities and obligations such as adopting bylaws, holding shareholder meetings, holding director meetings, filing annual reports, etc. And if these aren’t done, the corporation can be invalidated opening the owner up to liability.
How are S & C different?
Taxation is the biggest. C corps are your standard corporation and are separately taxed. S corps are special and are pass-through tax entities. They file an information federal return but no income tax is paid at this level. The profits and losses are passed through to the owners’ personal tax returns.
C corporations have no restrictions on ownership but S corporations are. They are restricted to no more than 100 shareholders who must be US citizens or residents. Also, S corporations cannot be owned by C corporations whereas C corporations can be owned by other C corporations.
This has the best of all worlds. You have pass through profits and losses which you pay on your own income tax return, and you have limited liability protection. It can be a bit confusing if you have multiple members, and there are two types of LLCs depending upon if you’re partners or managing partners.
You will be responsible for paying self-employment taxes quarterly.
This is the easiest to set up in that you just start your business. You may need to publish a notice in a local paper stating that you personally are doing business as (DBA) your company name if you choose a different name.
No matter which you choose, you should contact your city or town and find out if you need a business license, even if you’re working out of your home.