One of the first difficult decisions you must make when starting a business is choosing your business entity type. It can get confusing to research what the differences are and what each entity means. I will be breaking down each one below so that you’ll have a better understanding of just what you can set up. What is a Business Structure? A business structure is a legal/government classification which determines several factors in your business. Your type of entity determines the type of taxation used for your business, the personal liability attached to it, and lastly how much and what type of paper work you must file. These factors can become obstacles if you choose the wrong entity which is why it is important to research before your form one. Of course, you can always change your entity in the future, but it usually involves a lot of confusion between your business and IRS! Sole Proprietorship A sole proprietorship is the most common entity used by small businesses because it can often be the simplest. It’s formed with minimal paperwork in some states and absolutely none in others. Due to there only being a single owner, this person has complete
What is a C-Corp? So you might be asking, what is a C-Corp and how is it taxed? A C-Corporation is a legal structure of business in which the owners and shareholders are separate from the corporation. This means that the income made by the owner is taxed separately than the corporation. This type of corporation offers unlimited growth potential through the sale of stock; which can attract investors. There is no limit to the number of shareholders a C-Corp can have. Also, C-Corporations limit the liability of investment holders and firm owners. This is because the most they can lose is the amount of investment they put into the company if the business were to fail. How is a C-Corp taxed? C-Corps pay corporate income tax on earnings before they distribute their profits to the shareholders. Distributing their profits to shareholders is most commonly known as a dividend. As mentioned before, the taxation of the corporation is separate from the owners and shareholders. It is important to note though that the dividends handed out to the shareholders have to be claimed on their personal taxes. This is what is commonly known as double taxation. How does a C-Corp operate?