Forming corporate entities is a huge topic online. With so much inspiration and success models, online, it’s easy to see why folks are daring to be their own boss. So, to incorporate or not to incorporate? That is the constant question. It never gets old. The plethora of information online about it bears witness to the evergreen relevance of this topic.
That said, some content on the topic is either too lean in detail or way over people’s head. They take forever to get to the bottom line.
So not wanting to reinvent the wheel, I wanted to pull together a quick list of the five best sources I’ve found on forming corporate entities.
But before I share those sources, below find a quick reference list with my commentary. I figure you can keep this post handy as a reference to scan when you need it. Or, in case you don’t have the time to go through the links, today.
Although, I highly encourage you to make some time to look through the links as they give a better breakdown than my little summary.
Incorporating a small business is like buying home insurance. You may go years without needing it. But when disaster strikes, you are sure glad you made the investment. For, the main reason people incorporate is for liability protection and tax flexibility.
PRO: This is the simplest to form because it is owned and run by only one person–you. It requires no government paperwork. The only paperwork you would need to file is if you want to do a DBA (e.g. doing business as).
CON: There is no distinction between you and the business. Therefore, you would be, personally, liable for business activities that harm or injure another.
Limited Liability Company
PRO: This is a hybrid of a C corporation, a partnership, and sole proprietorship. It is made up of members vs. shareholders. It allows for unlimited members. It provides personal asset protection and tax flexibility. Flexibility as in any of the LLC members can choose to file their taxes as a sole proprietor would or how an LLC corporation would. The ladder allow what’s called “pass through” tax treatment. Pass through tax treatment meaning the profits and losses of the business pass through to the individual members personal tax return. They are not subject to double-taxation as with a C corporation.
CON: If you are planning to seek funding from venture capitalists–skip forming an LLC and form a C or S-corp.
PRO: S Corps offer personal liability protection and pass through tax benefit (i.e. avoiding double-taxation). It is easy to convert into a C corporation which is important because venture capitalist only invest in C corporations.
CON: It requires owner to file an “election” with the IRS because the S stands for Sub-Chapter S found in the IRS Code. It demands complicated record keeping. And, it only allows limited shareholders (up to 75). You definitely need to have a CPA in your pocket to handle the complexities of this entity. See how complicated this explanation, already, is? 🙂
PRO: It provides personal liability protection. It is the best entity to attract venture capital. It offers flexible capital structures due to it’s ability to raise funding from a variety of sources (e.g. IPOs).
CON: You will be subject to double-taxation. For, a corporation is seen as a separate “person.” So a corporation’s profits are taxed twice. This means a corporation pays tax on the profit plus the individual shareholders pay tax on those same profits. But unlike S corps and LLCs, losses under C corp do not pass through to individual shareholders to claim. Again, don’t even attempt a C without professional help.
5 Best Sources on Forming Corporate Entities from Around the Web
- Pat Flynn’s Smart Passive Income did a podcast round-table of business lawyers that was super informative. You can listen to it here. Make sure you have pen and paper or Evernote in hand.
- Neil Patel’s blog Quick Sprout has a very detailed break down of the pros and cons of all six potential corporate entities in its Beginner’s Guide to Corporate Entities.
- Fox Business News’ blog gives a good synopsis of the 5 Reasons Why Small Businesses Should Incorporate.
- Entrepreneur Magazine schools us on the Top 5 Mistakes Entrepreneurs Make In Forming Your Corporation.
- Finally, the video below from Fit Small Business does an excellent job describing each entity in clear terms that everyday people can understand. Very relatable, he gets right to the bottom line of each entity.
So there you have it. I hope this helps you. If you find this post helpful, then please share it and comment below or tweet me @goodbyebrokegirl and let me know which entity you will choose for your new business. Thank you for reading and sharing.