The right Corporate form can save you money and headaches. Making a decision about your corporate form or structure can be technical and complex. This area of law and tax structure has gone through major changes over the last ten plus years, with the introduction of the Limited Liability Corporation (LLC)  business organization filing in 1977 (by 1997, all 50 states had passed legislation authorizing this establishment of business structure) and changes regarding S Corps.

As an entrepreneur where do you turn for information? Even my personal attorney was not fully aware of the new filing status for L.L.C. of sole owner or as the IRS classifies it “Sole Member“.

I will try to condense the types of business structures down to an easy review format with possible choices for everyone. As with everything, you might want to contact a business lawyer and/ or an accountant for further information regarding which business structure is best in regards to your business, tax structure, needs, assets and your local city and state laws.

Sole Proprietorship - One Owner

Pass Through Federal Taxes & Losses

Unlimited Personal Liability for the Business

This business structure is the easiest to set up. The problem is the unlimited personal liability leaves your personal finances and property at risk.

L.L.C. (Limited Liability Company) - One or more owners

Pass Through Federal Taxes & Losses

Limited Personal Liability - Like standard corporations, all LLC owner(s) are protected from personal liability for business debts and claims. This means creditors can not go after your personal property or assets. If any thing would happen to the business, you would stand to lose only the business owned property and assets.

Forming an LLC - Will be easier and less expensive than creating a corporation.

S - Corporation (not an actual corporation but rather a tax status filing) - One or more shareholders

Dividend Income and W-2s - Taxed only once with wages or on dividends

Limited Personal Liability - Like standard corporations, an S Corporations’ owner(s) are exempt from personal liability for business debts and claims.

Forming an S- Corp - Should hire done but is less expensive than creating a corporation.

C - Corporation - Unlimited number of shareholders

Dividend Income and W-2s - “Double Taxation” Pay corporate income and on dividends

Limited Personal Liability - Shareholders are exempt from personal liability for business debts and claims.

L.L.C. (Limited Liability Company) - One or more owners (Massachusetts requires two owners) Each state contains different provisions and requirements, so check your states’ requirements prior to forming.

Pass Through Federal Taxes & Losses Will go by amount of ownership per individual.

Unlike a Corporation, an LLC is structured by the IRS with pass through entity. The IRS treats the LLC like a sole proprietorship or a partnership, depending on the number of owners or members.

You still must make quarterly estimated tax payments and will have to pay the self employment tax “Schedule SE“.

Single Owners, IRS treats as a sole proprietorship and requires “Schedule C” to be filed with your 1040. example; JR Services, L.L.C.

More then One Owner, (treated like a partnership) you will have to file “Form 1065“, this is an informational form. This form tells the IRS each owners or members share of the profits or losses. The business must also provide each owner or member with “Schedule K-1”, which breaks down each persons’ share of the business. The IRS will match these form amounts up with “Schedule E” that each owner or member must file with their 1040.

Limited Personal Liability - Like standard corporations, all LLC owner(s) are protected from personal liability for business debts and claims. This means creditors can not go after your personal property or assets. If any thing would happen to the business, you would stand to lose only the business owned property and assets.

Forming an LLC  - Will be easier and less expensive than creating a corporation.

1. Need a business name that is not taken and must end with an LLC designation. Check with your Secretary of States’ Office (most are on the Web) to see if your proposed name is available for use. You can use any designation you like (example: ABC LLC, ABC L.L.C., ABC Limited Liability Company, ABC Ltd. Liability Co., or ABC Limited Company) all qualify for the “Must end” of the business name. You can check and file in most states right on the Internet. Check your states’ filing requirements for an LLC.

2. Besides following your states’ LLC naming requirements, you must make sure your name will not violate another company’s trademark. MSN offers a free trademark search at http://auto.search.msn.com/results.asp?cfg=SMCINITIAL&srch=5&FORM=AS5&RS=CHECKED&v=1&q=trademark

3. You need to file your articles of organization or certificate of organization with your business name to your state. There will be a filing fee, typically around $100, but some states require an annual tax also. Typically the state will have available a blank document or form to use for your articles of organization.

4. Operating Agreement - no need to file and are rarely required by state law BUT you need to create one. In an operating agreement, you set the rules for ownership and operation of the business. This will help prove in court the business has its own separate legal entity and is separate from your personal assets.

5. Some states require you to publish in a local newspaper a simple notice stating that you intend to form an LLC.

6. You may need to obtain licenses and permits that may be required for the business to operate. These may include a business license or tax registration certificate, a Federal Employee Identification Number (EIN #), a State EIN, a sellers’ permit, or a zoning permit. You must register a fictitious or assumed business name.

I recommend hiring an attorney or B2B business filing organization such as Company Corporation^® to set this business structure up and file all the proper papers. There are a growing number of “Incorporating Service” Internet based services. There are a slue of self help books and programs available on the market also. Many self help books can be found at your local library.

Costs run $1000 plus the state filing fees for attorney services or around $200 plus the state filing fees for Internet based services such as Company Corporation^®. With these types of business formats, you will be an employee of the company and you will be required to pay Workman’s Comp. (This is something to strongly consider when your company deals with physical labor using heavy equipment, security, and/or other service types that classified as high risk. These categories of business typically must pay high Workman’s Comp fees.)

S - Corporation - One or more shareholders - up to 75 shareholders or 150 shareholders if spouses are shareholders, but only one basic classification of stock; Has slight flexibility on the voting rights.

Dividend Income and W-2s -(Will go by amount of ownership per individual - like a partnership) You set wage(s) and the balance of profits can be taken as dividends.

Put simply, their profits are usually taxed just once which avoids the double taxation that C Corporations face. The company issues “shares” to owners, usually by the percentage of ownership.

Employee Stock Option Plans (ESOPs) - S Corps can now establish employee stock option plans. This can be an employee incentive option.

Officer’s - Those holding stock or have a financial interest in the company are Officers. Officers of the (S) Corporation can "donate" as much of their time as they want without the Corporation having to pay wages for their time. This is because an officer has a vested interest in the corporation.

Limited Personal Liability - Like standard corporations, an S Corporations’ owner(s) are exempt from personal liability for business debts and claims. This means creditors can not go after your personal property or assets. If any thing would happen to the business, you would stand to lose only the business owned property and assets.

Will be a little more costly than an LLC to form and maintain due to all the paper work, filing, and accounting needed.

Election for an S Corp status filing must be completed, often within certain timeframes of the incorporation act. This is another issue to discuss with the attorney, accountant or B2B service completing the filing process for you.

C - Corporation - Unlimited number of shareholders - no limits on stock classes or voting arrangements. "C" corporations are typically considered Public corporations where there is little to no control over who is actually a shareholder. These corporations' stock are usually available to the general public.

Dividend Income and W-2s - Dividends are taxed at the corporate rate and then the shareholder pays taxes on their dividends; losses and deductions stay at the corporate level; there is no pass through on these. This is the “double taxation” everyone talks about. The corporation pays taxes on all profits and the shareholders pay taxes on their dividends. You would be an employee and receive pay on a “W-2”. This is a deduction for the corporation, prior to taxation.

Limited Personal Liability - Shareholders are exempt from personal liability for business debts and claims. This means creditors can not go after your personal property or assets. If any thing would happen to the business, you would stand to lose only the business owned property and assets.

Officer’s - Those holding stock or have a financial interest in the company are Officers. Officers of the Corporation can "donate" as much of their time as they want without the Corporation having to pay wages for their time. This is because an officer has a vested interest in the corporation.

Most expensive to form and maintain due to all the paper work, filing, and accounting needs. Can also be costly from a tax perspective with the double taxation. Corporations have more state and federal rules and regulations. This form of business structure is great if you become very large, want to sell stock, or are looking for major financing (perspective investors like C - Corporations).

• You have obtained personal assets and property of some value. You need to limit your personal liability. LLC, S-Corp., or C- Corp.

• You are thinking about adding fringe benefits or incentives for employees. S- Corp. or C- Corp.

• The company needs capital, looking for venture capital or a public stock offering. C- Corp.

It is important to realize that this protection is not absolute. This drawback applies to LLC and all Corporations. A person can be held personally liable if he or she:

• Personally and directly injures someone

• Personally guarantees a loan or a business debt

• Fails to deposit taxes withheld from employees’ wages

• Intentionally does something fraudulent or illegal

• Treats the business as an extension of his or her personal affairs, rather than as a separate legal entity.

This last exception is the most important. A court of law might rule that the LLC or Corporation does not truly exist and find the owner(s) are actually doing business as individuals who are personally liable for their acts. To keep this from happening, make sure you:

• Do not conceal or misrepresent material(s), facts, or the state of your finances to clients, creditors, vendors, or other outsiders.

• Have invested enough money to meet your business requirements and expenses.

• Get a Federal Employer Identification Number (EIN #)

• Have a “business only” checking account.

• Keep your personal finances out of your business.

• Obtain a business credit card or two and keep only business purchases on them.

• If you must use personal charge try to keep the business and personal separate.

• Set up accounting books or a program for the business and keep All receipts.

• Create a business plan, an operating agreement and by-laws for the company.

• Having something formal and written which lends to the credibility of your business.

A good liability insurance policy is required and with certain business services, Professional Liability or Errors and Omissions Insurance is needed. You will also need to obtain office or building insurance. For Home Offices; check your homeowners’ policy for coverage. Most homeowner insurance policies limit coverage to $5000 on office equipment, but for only a few dollars more you can increase that to $25,000. You will want to discuss the various types of insurance coverage to thoroughly protect not only yourself and your personal assets but also all your business services and business assets with your insurance agent. Various coverage types include but may not be limited to the following based upon the nature of your business:

• Products Liability

• Business Interruption

• Property Damage Liability

• Theft

• Worker's Compensation

• Vehicle

• Inland Marine

• Property

• Personal and Advertising

• Medical, Health and/or Life

• Commercial Umbrella

• Business Owner's

• Terrorism

• Flood

• Conversion

FirstGov: www.firstgov.gov US Government’s portal for hunting federal information.

SBA: www.sba.gov Details on government loans and many program of assistance.

US Patent & Trademark Office: www.uspto.gov

IRS: www.irs.ustreas.gov/ Get tax forms, advice, and information

Business Owners Idea Cafe www.businessownersideacafe.com

SCORE: www.score.org Counselors to small business

American Association of Home Business: www.aahbb.org/

Business Plans: www.bplans.com

Company Corporation^® incorporation services and and free booklets regarding business structure selection

Other reference materials used to obtain this information:

Bottom Line News Letters

Ernst & Young Tax Guide

Accounting Fess& Warren

Starting & Operating a Business Oasis Press

The Legal Environment of Business Corley, Reed, Shedd

Law for Business Ashcroft & Ashcroft

Business Laws - Uniform Commercial Code