Fall is right around the corner, and many entrepreneurs are gearing up to launch a small business. They’ve established a unique selling proposition. They developed a business plan, and have an understanding of what makes their company stand out from the competition. Now, they need to establish credibility for the startup.
One of the fastest ways to do it? Incorporate a business with a legal formation.
Here’s where things get tricky for entrepreneurs. If they decide not to incorporate the business, they may struggle to build a sense of trust with consumers. However, there are several business formations available to incorporate as and it can be difficult to determine which one is the best fit for the needs of their business. If you’re not familiar with legal structures, here’s a shortlist of the most common entity types.
- Limited liability company (LLC)
- Partnership
- Corporation
- Nonprofit corporation
How do you know which entity is best for your business? Let’s take a look at these five entities to determine the types of companies that should incorporate as each one.
Limited Liability Company (LLC)
Why choose this entity?
LLCs are one of the most flexible formations available to entrepreneurs. Under an LLC, you’ll receive liability protection. This allows for the separation between personal and professional assets, ensuring that if something unforeseen should negatively impact your business it will not affect your personal belongings. LLCs may also choose how they would like to be taxed, as either an S Corporation or C Corporation election.
Which businesses are ideal to incorporate as an LLC?
Plenty of businesses may incorporate as an LLC, from consultancies to construction companies to retail storefronts.
General partnership
Why choose this entity?
There are several types of partnerships available to incorporate a business as. Some of these include joint venture, silent, and limited liability partnerships (LLP). However, many entrepreneurs looking to go into business with a partner opt for a general partnership. This entity establishes an agreement between the company’s partners that allows for all profits and duties to be divided equally with its partners.
Which businesses are ideal to incorporate as a general partnership?
Would you like to go into business with a friend or family member? Then you may consider incorporating as a general partnership alongside your partner. Remember, however, that partners are responsible for everything that happens to the business. It is advised that you create a written partnership agreement before moving forward. This document outlines the daily roles and responsibilities of each partner and addresses protocol for admitting new partners or any partner exits in the company.
Corporation
Why choose this entity?
Much like an LLC, corporations also provide liability protection to a small business and its professional and personal assets. However, corporations are often dinged for their double taxation. A corporation is taxed as a separate legal entity. It is held responsible for paying tax on its profits and an additional tax on dividends that a corporation will distribute to its shareholders. These dividends are not tax deductible, and as such are taxed twice.
However, there is a slight loophole around double taxation for corporations. Remember how LLCs have the ability to elect an S Corporation? A corporation that has fewer than 100 shareholders may also file for S Corp election status, and be treated like a pass-through entity.
Which businesses are ideal to incorporate as a corporation?
Many businesses across a wide variety of industries may be ideal to form a corporation — especially if they plan to go worldwide! These companies may range from software apps to fast food restaurants to retail fashion stores. If you have plans for global expansion, a corporation may be a strong candidate to incorporate as. You may issue shares and establish an initial public offering (IPO) under the structure.
Nonprofit corporation
Why choose this entity?
This is the only entity in our roundup that has the ability to file for tax exempt status. Eligible businesses that form a nonprofit corporation, with the intention of benefiting the public or a specific group of individuals, may apply for tax exempt status through the IRS. Most businesses tend to file for 501(c)(3) status. This type of tax exemption allows nonprofit corporations pursuing their missions to be exempt from paying federal and state taxes. Nonprofits may even secure government grants and donors under a 501(c)(3) status.
Which businesses are ideal to incorporate as a nonprofit corporation?
Companies interested in forming nonprofit corporations must be committed to pursuing a social mission that helps benefit the general public. If you want to file a nonprofit corporation under a 501(c)(3) status, the nonprofit corporation must be founded for a specific purpose. Eligible nonprofits that pursue charitable, religious, educations, scientific, and literary purposes may file for this specific tax exempt status.