How to protect your Assets by Incorporating your Business?

Protect your Assets

As soon as an entrepreneur decides the offerings of his/her business, the next step is to take a decision on the type of business formation. The entrepreneur can decide from several options namely, sole proprietorship, general partnership, limited liability company (LLC), limited liability partnership (LLP), C Corporation and S Corporation. The difference between these business formations lies in tax laws and personal liability of the shareholders in the business.

In USA there are mainly two types of business formations, Corporations and LLC. To the business owners who do not completely understand the benefits of incorporating their business I have gathered some facts to help them decide.

Firstly, let’s consider the difference between the sole proprietorship and incorporating the business. When a business owner operates his company under his own SSN and its income is reported on his personal tax return it is known as sole proprietorship. Most of the small businesses operate on this form as it is the easiest and the owner of business will have the complete freedom to make the decisions. Hence, the sole proprietors own all the assets of the company as well as the profits. The liability of this business structure is that the owner is legally responsible for the debts against the business.

But with incorporation the business gets a separate identity from who own it. A corporation is owned by its shareholders. The number of shareholders may range from one to thousands as in publicly traded companies. In a corporation, the shareholders vote for Board of Directors to look after major decisions and policies.

When you incorporate your business your personal assets and business assets are different from each other. Hence, you can protect your business assets when a personal financial crisis happens. The drawback of incorporating is a lot of paperwork! And the fact sometimes called as double taxation for regular corporations, which will be clearer as you read through.

There are two types of incorporations: C Corporations, S Corporations

When a company is made into a corporation it is a C Corporation ( also called as Regular corporation ) and it will remain so until all the shareholders consent to make it an S corporation by filing form 2553(with IRS) to sought Special Tax Treatment (Pass through Taxation) to rule out double taxation. There is no limit on number of shareholders in a C corporation.

The C Corporation will be taxed on the profits as a separate entity at first and then the shareholders will be taxed on the dividend of profits they receive. This is called as double taxation. Only the C corporations undergo double taxation whereas, S Corporation and LLC’s don’t.

An S Corporation may have maximum 75 stockholders. Also the S Corporation will be taxed in a similar manner of sole proprietorship. The S corporation itself doesn’t pay the income tax but the individual stockholders need to include their share of the income from this corporation’s profit in their personal tax returns.

Limited Liability Company (LLC)

The LLC combines aspects of partnerships and corporations. Owners of LLC are called as members and there is no limit to the number of members. This form gives all the advantages of Corporations like limited liability to its owners and pass through taxation like in partnerships (Or in S Corporation). LLC also hold few advantages for foreign investors. The members of LLC will be taxed only once despite of the fact that whether or not the owner has the social security number or a visa permitting employment in the US. Even if the foreign owner has to return to homeland on expiration of visa they will not be charged the tax twice. But wherein S corporation owners don’t have this leisure, and they will be double taxed.

Hope the above information and comparison have helped you to clear the understanding on different business formations!

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