Tweet

How To Choose The Right Structure for Your Business

Written by: Kenneth Sprang

Article Overview: In recent years the LLC has become the darling of entrepreneurs and small businesses around the country. But the LLC is not always the best choice. Sometimes a Subchapter S corporation or another structure is preferable. This article helps you choose the right structure for your new business

How To Choose The Right Structure for Your Business

1) Determine Your Long Term Goals

Is your goal to create a company that will grow and then go public, or be sold to a larger company for millions of dollars, or do you intend to run a small family business where you, members of your family, and perhaps a few trusted associates will be involved? Will you operate primarily in your home state, or will your focus be national or international? These questions are critical in deciding how to organize your new business. For example, if your goal is to be acquired or go public, you probably want to create a "C corp." If you and a few friends or family members are creating a business that will not expand, at least in terms of owners, an LLC may be perfect. On the other hand, you may want the formalities of a Subchapter S corporation.

2) When to Use an LLC

LLC's and corporations both insulate the owners from liability. An LLC has "members" rather than shareholders. The members can run the company or have one or more "managing members" do so. The LLC is an excellent tool for holding rental property--I recommend that each building be held by a separate LLC so that any liability is limited to that building. If your company is going to have only a few owners or members, an LLC may be ideal. The paperwork is somewhat simpler than a corporation (though many states allow "close corporations" in which the shareholders run the organization just like members of an LLC). The LLC is usually a good substitute for a sole proprietorship. Note that all income from the LLC will be treated as ordinary income and subject to FICA and income tax. Although you can elect to have an LLC taxed as a corporation, generally the LLC is taxed like a partnership or sole proprietorship and profits are distributed to the members and taxed as ordinary income.

3) When to Use a C Corporation

A C Corporation is a garden variety corporation with no limits on the number of shareholders it can have. If you want to grow your shareholders and maybe go public or be acquired, a C Corporation is generally the best choice. The local XYZ Store can be a C Corp, and IBM is a C corp. When creating a C Corporation, you will need guidance on how many shares to authorize and how many shares to issue. This is true for both a C corp and a Subchapter S Corp

4) When to Use a Subchapter S Corporation

IIf you create a corporation, you may file a form with the IRS asking to be treated as a Subchapter S Corporation. In order to qualify, the number of shareholders must be limited and no shareholder can be a corporation. The advantage of the Subchapter S Corporation is that profits or losses are passed directly to the shareholders and the corporation itself is not taxed. With a Subchapter S, you can pay yourself a salary but distribute some profits as dividends, possibly avoiding self employment tax on some income..

5) Where Should I Organize My Business?

Generally speaking, you can organize your business in any state where you have an actual presence. That can be the state where you live or it can be a state where you have an office. Many companies organize in Delaware, because Delaware does not require companies to have a physical office in Delaware. You can have your registered agent there serve as your office. There are three things to consider: First, where do you have a physical presence. Second, what are the franchise or similar fees charged in the states you are considering. For example, CA charges $800 a year, while Delaware charges less than $200 for a small company. Finally, in what state will your business be taxed and what are the tax rates there? If you can organize and operate your business in a state with lower tax rates, that is usually an advantage.


6) Can You Give Some Examples

The following examples may help. (1) an interactive advertising client was virtual, with all staff working in different locations around the country. The goal was to go public or be sold. I formed a DE C corporation for the company; (2) a TX HR consulting firm is owned by four persons. They do business nationally, but they have only one office which is in TX. I created a TX close corporation and chose Subchapter S status; (3) another Texas HR and recruiting firm is smaller and owned by one person. I created an LLC for that client. (4) a CA based client incorporated with a C Corp. in DE created a subsidiary. We put the subsidiary in PA because there is a nominal presence there and the franchise fees were modest.

Related Articles
  Choose a Structure
  When Opening A Small Business, Choosing the Right Business Structure is Something that Should Not Be Taken Lightly
  Why MLM And the Hype Surrounding It Are Old News!
  The Gerber Method
  Matrix Organization - Possible in China?

Article Tags: c corp, c corporation, close corporations, family business, family members, fica, formalities, garden variety, income tax, larger company, llc llc, new business, paperwork, partnership, profits, rental property, shareholders, sole proprietorship, subchapter s corporation, term goals



Related Forum Posts
My entry - 1. The Best Business Books Ever: The 100 Most Influential Business Books You'll Never Have Time to Read - this is a fascinating book about the history of Business theory, and I'd recommend it to anybody. 2. The Big Book of Small Business: You Don't Have to Run Your Business by the Seat of Your Pants, by Tom Gegax. Ditto. 3. PADI: The Business of Diving Book Okay, so this book won't be of use to anyone who doesn't want to start a scuba store, but I did, and this book was of course invaluable to me in reaching that goal.
Exclusive: Interview with Results - Hi Forum Members, I'm helping start up a Business Coaching and Consulting company here in Toronto, Ontario, Canada (a Subsidiary of RSC Business in Los Angeles). As a Research and Development Intern I am required to practice my listening and interview skills by surveying Small and Medium Businesses on thier Business. This Survey is designed by RSC Business to also assist the Business being interviewed more insight into their own business. I am looking to interview about 30 businesses across North America over the span of 3 months. At the end of these interviews I will be publishing a report of the results and they will be made available for free to the Interviewees. The Report data will include responses from a minimum of 100 interviews. I would like to extend this opportunity to members of the Forum. If you would like to have this short 20-30 minute interview conducted on your Business and you reside in North America please send me an email or PM. Please contact me at andy[at]jvprosperity[dot]com to arrange our interview and to get free access to the results when they are published.
Re: HOw to market a B2B consulting company - [quote="zohahunt77":428owzbi]Hi, I was wondering if anyone can tell me the difference between B2B and B2C. I don’t know about b2b marketing but I have done marketing so know things about it. I will suggest you to take online services which will spread your business all over web network. Online marketing is the best way to market any business.[/quote:428owzbi] B2B = Business to Business - You are marketing to other businesses. B2C = Business to Consumer - You are marketing to consumers.
English teachers learn Japanese as Interns - Yasunori, what about the many students that leave N. America to teach English in Japan. They may want to learn Japanese (maybe Business Japanese is a bit different) and the Japanese Business Culture.
New Study - Women prepare better business plans - I found an article in Business Week and I found this quite interesting. [quote:ka7lg35i]Who Prepares Better Business Plans, Men or Women? A new study based on four years of data from men and women in a training program for microenterprises finds that they come out the same in quality scores. "However, women scored significantly better on the presentation of their plan to judges," conclude the study's authors, Ronald G. Cook, Paul Belliveau, and Christine Lentz of Rider University, in a paper presented at a recent meeting of the Small Business Institute. [/quote:ka7lg35i] What do you guys think?


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

The Future of Online Marketing

Do You Pretend To Listen To People?

9 tips to increase ROI in PPC Campaigns

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.