Ever wonder why there are different types of businesses? Shouldn't everything just be a business or not a business?
There are C-Corps, S-Corps, LLCs, partnerships. Companies are public and private, it gets confusing.
Over the years the US tax code has become so complicated that it literally needs it's own map.
Talk about confusing!
Part of the complication is taxes and cashflow coming from a business. Today, we're going to talk about a few different types of business structures to think about how to pay yourself and your employees.
First of all, I'm not a business attorney or CPA, so be sure that you work with one of those people before you take this as formal advice. Consider this as a discussion just to get your mind going!
An LLC is a Limited Liability Corporation. It limits the responsibility or liability for the business owners. If you invest $5,000 into an LLC worth $100,000, you own 5% of the business. If something happens down the road and the business is sued or has some payments to be made, you're limited to 5% of the responsibility of the entity. They can't come after your personal stuff.
A good example is if you own several apartment buildings. One person sues you for something that happened in apartment 1. They want the assets from apartments 2,3,4. Of course they do…
With an LLC the responsibility is contained within the entity. This is similar to a C-Corp, but without the double taxation of corporate and income taxes.
An S-Corp allows the entity to limit the amount of corporate income taxes paid. Instead the profits and losses can passed on to the partners or shareholders onto their individual income taxes.
Why is that important? Say you had 10 businesses that all did well. But one that went bankrupt. If you can write off those losses against the profits, you may not have to pay taxes for a long time.
Small business owners may like S Corps because they wont have to pay the self employment tax.
There are some big-time restrictions for S-Corps including the number of partners and even residency. To avoid an audit, you should tread with S-Corps very carefully!
A C-Corp is your "typical" business organization. They pay employees and withhold taxes. They have limited liability for owners, and they can be perpetual.
One big difference is that they are required to hold annual meetings.
With all of the same protection as other entities, the another difference is that fact that you have to file taxes in the name of the business.
Once the business makes a profit, they have their own reports to file. Major corporations like Amazon can actually pay no taxes, because they have no deductions and allowances than they did profit.
This is what I think most business owners hope for, so they try to put all of their expenses in the name of the business to maximize deductions. It usually doesn't work out for the best as most businesses fail.
I'd believe that as you venture down the path of starting a business entity, you ought to consider the book called "Profit First." It's by Mike Michalowicz and helps owners think about the different types of accounts they should have as they seek to generate a profit.
Check out our other post about profit first!
Be sure to connect with an attorney, accountant and/or a bookkeeper to keep track of everything! If you find that one business entity isn't working you may want to file articles with your state to change entity types.