The corporation should also issue stock, file annual reports and hold yearly meetings to elect officers and directors, even if they’re the same people as the shareholders. On all references to your business, make certain to identify it as a corporation, using Inc. or Corp., whichever your state requires. You also want to make sure that whomever you deal with, such as your banker or clients, knows that you’re an officer of a corporation.
The S Corporation
The S corporation is more attractive to small-business owners than a standard (or C) corporation. That’s because an S corporation has some appealing tax benefits and still provides business owners with the liability protection of a corporation. With an S corporation, income and losses are passed through to shareholders and included on their individual tax returns. As a result, there’s just one level of federal tax to pay.
In addition, owners of S corporations who don’t have inventory can use the cash method of accounting, which is simpler than the accrual method. Under this method, income is taxable when received and expenses are deductible when paid. Some relatively recent tax law changes brought about by the Small Business Job Protection Act of 1996 have made S corporations even more attractive for small-business owners. In the past, S corporations were limited to 35 shareholders. The 1996 law increased the number of shareholders to 75. Expanding the shareholder number makes it possible to have more investors and thus attract more capital, tax experts maintain.
S corporations do come with some downsides. For example, they’re subject to many of the same requirements corporations must follow, and that means higher legal and tax service costs. They also must file articles of incorporation, hold directors and shareholders meetings, keep corporate minutes, and allow shareholders to vote on major corporate decisions. The legal and accounting costs of setting up an S corporation are similar to those of a standard corporation.
Another major difference between a standard corporation and an S corporation is that S corporations can only issue common stock. Experts say this can hamper the company’s ability to raise capital. In addition, unlike a standard corporation, S corporation stock can only be owned by individuals, estates and certain types of installment loan with no credit check Arkansas trusts. The 1996 Small Business Job Protection Act law also added tax-exempt organizations such as qualified pension plans to this list starting in January 1998. Tax experts believe this change should help provide S corporations with even greater access to capital because a number of pension plans are willing to invest in closely held small-business stock.
Limited Liability Companies
Limited liability companies, often referred to as „LLCs,“ have been around since 1977, but their popularity among small-business owners is a relatively recent phenomenon.
An LLC is a hybrid entity, bringing together some of the best features of partnerships and corporations. „An LLC is a much better entity for tax purposes than any other entity,“ says Ralph Anderson, a CPA and small-business tax specialist with accounting firm M. R. Weiser. LLCs were created to provide business owners with the liability protection that corporations enjoy without the double taxation. Earnings and losses pass through to the owners and are included on their personal tax returns.
Sound similar to an S corporation? It is, except an LLC offers small-business owners even more attractions than an S corporation. For example, there’s no limitation on the number of shareholders an LLC can have, unlike an S corporation, which has a limit of 75. In addition, any member or owner of the LLC is allowed a full participatory role in the business’s operation; in a limited partnership, on the other hand, limited partners aren’t permitted any say in the operation. To set up an LLC, you must file articles of organization with the secretary of state in the state where you intend to do business. Some states also require you to file an operating agreement, which is similar to a partnership agreement.