There are several crucial decisions you must make when starting a business. One of the most important aspects is deciding what form of legal structure the company will follow. Each structure has its own benefits and drawbacks. The structure has an effect on taxes your business will pay as well as other economic factors. Limited Liability Companies, partnerships or sole proprietorships pay taxes on their personal incomes. Corporations go through different taxation rules as defined by Subchapters C and S of the Internal Revenue Code.
A 'C corporation' is generally taxed separately from its owners. It provides inadequate protection to the owners from personal liability. It is the most widely accepted business structure in the United States. One disadvantage of using a C structure is that it is complicated and difficult to handle. Maintaining corporate status is challenging and businesses find it tough to cope with the formalities involved. C corporations face double taxation on their income. Shareholders are taxed on their personal returns even though the corporation has already paid taxes on the same income.
S corporations, on the other hand, serve the same formalities as C corporations, but can avoid being taxed twice. Qualifying to be an S corporation means meeting several requirements. The company must be domestic, with a maximum of 100 shareholders. There should be only one type of stock being sold, and corporate partnerships are not allowed. All shareholders must agree upon all clauses of subsection S. Certain clauses make it difficult for shareholders to market their shares.
Before you choose a legal structure that you want for your business, it is advisable to contact an experienced attorney. The attorney will assess your business and help you with the decision.