Business Formations

Owning a small business is an exciting way to make a living. People are drawn to the idea of starting their own business for many reasons, such as the freedom to carve their own path, the ability to reap the full financial rewards of their work, or the opportunity to pursue a passion. Along with these enticing advantages come some downsides as well, such as managing payroll, dealing with taxes, and of course, liability. Every business-owner should consider forming a business entity to protect themselves and there are several options available. While there are many distinctions between them, the key differences are in how they are structured and how they are taxed

C-Corporation

This is the classical form of a corporation. It has shareholders, a board of directors, and officers. It has its own fully-fledged annual income tax return. Some of the advantages of a C-Corporation are its potential for complex structures that can accommodate investors and an array of different roles and authority levels, its ability to maintain long-term financial independence from its owners, and its ability to help its owners maintain tax compliance. Some of the disadvantages of a C-Corporation are increased accounting labor/expense, a requirement to pay owner-operators a reasonable salary, and a potential for corporate income tax.

S-Corporation

This is a variant form of a corporation reserved for use by small businesses. It has all the same structures as a C-Corporation, but it files a simplified annual tax return and any profits “pass-through” automatically to its owners’ personal income tax return. This can present tax savings for the owners, and help simplify the corporation’s tax filings, but also reduces the corporation’s ability to insulate the owners’ finances from those of the business.

Multi-Member LLC.

Limited Liability Companies offer a simpler structure, with owners called “members” and none of the tiered power structures of a corporation. If an LLC has more than one owner, it is naturally a multi-member LLC. The owner-operators of an LLC are not required to be paid a reasonable salary with withholding, which means more flexibility in getting money out of the business, but the need for the owners to manage estimated tax payments instead. The default tax treatment for an MMLLC is partnership taxation, however the entity can instead elect to be taxed as either a C-corporation or an S-corporation.

Single-Member LLC.

If an LLC has just one member, it is a single-member LLC, the simplest of all business structures that offer liability protection. The default tax treatment for an SMLLC is as a “disregarded entity” meaning that it can file on a Schedule C of its owner’s personal income tax return. This structure generally suits a very small and very simple business quite well and allows all profit or losses to easily pass through to its owner’s personal return.

DBA

Many small businesses start as a DBA, a simple form that one person or a group of people file with their county clerk stating that they are “doing business as” a specified name. This document is of virtually zero legal significance. It does not prevent anyone else from using the same name. It does not allow the owner to achieve any preferred tax treatment. Most importantly, it does not create an independent legal entity with the accompanying liability protection for its owner. Almost every person operating a business under a DBA would be well-advised to upgrade to a true business entity, like an LLC or corporation, that will protect them from most business liabilities attaching to them personally.

Choosing the Right Structure

Choosing the structure for your business is an important moment in your business’s history. There are many different factors to consider, and the guidance of an attorney who understands the many different options and their characteristics can help ensure that you make the right decision for your business now and for the future. While it can be tempting to take a “do it yourself” approach or use an online formation service, this often leads to bigger problems, such as a non-optimal structure, incomplete documents, or a lack of understanding of how to operate the business entity. The professionals at McLaud Law P.C. have formed and counseled hundreds of corporations and LLCs. We can guide you through the process and ensure your business entity is fully formed and ready to operate. Call us for a consultation to discuss your business and what different entity structures can offer your business. Serving Rochester, Webster, Greece and Irondequoit NY.

This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.

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