I was asking the same question for a long time until my wife bought me the book, How to Start a Business in Colorado from the Smart Start Series written by the Entrepreneur Press. Some exerpts are listed below. I've condensed a lot of the information. A lawyer that specializes in the formation or corporation can obviously give you far more detail and information, but in the mean time, the basics are listed below...
General (C) Corporations
A general business corporation is the most formalized and most common type of corporation. In a c-corp, its owners are stockholders, and ownership is based on shares of stock. There is no limit to the number of stock holders. SInce the corporation operates as a seperate entity, each stockholder's personal assets are protected from attachment by creditors of the corporation. Thus, as a stockholder, your liability is limited to the capital that you have invested in the purchase of stock.
Advantages:
1. a corporation has a lifespan independent from its owners (stockholders)
2. fringe benefit costs are tax-deductible
3. personal assets are protected from business liability
4. ownership can be transfered through the sale of stock
5. It may be easy to raise operating capital through the sale of stock
Disadvantages:
1. Incorporating involves considerable start-up expenses
2. profits are subject to dual taxation - as profits and again as dividends
3. many legal formalities exist when filing and trying to maintain corporate status
4. activities are limited to those defined in the corporate charter
S Corporations
The S Corporation is a form of the general corporation that has a special tax status with the IRS and many states.
-The most attractive benefit of an S corporation is the avoidance of double taxation. S corporations avoid this dual taxation because all losses and profits are " passed through" the corporation to the shareholders and are declared only once to the IRS, as part of each shareholder's income.
-There is a downside however, all profits must be taxed. If the corporation makes a profit, each share holder is required to pay taxes on their proportionate share of that profit regardless if that profit is distributed or not. If there is a disagreement with the IRS, the IRS can obtain payment from the assets of individual shareholders.
-On the other hand, if the s corp loses money, there may be a significant tax benefit to it shareholders. THe loss is passed on to the each shareholder proportionate to their stock ownership.
-As in other forms of corporations, each shareholder's personal assets are protected from the business's debts.
-In order to form an S Corporation, you must meet specific requirements set by the IRS (I only listed some of the larger items of interest below). Your business must:
1. already exist as a corporation (c-corp most likely)
2. have no more than 75 shareholders
3. Be headquartered in the US
4. Not have shareholders who are nonresident aliens
5. not be a financial institution that takes deposits or makes loans
6. not have more than 25% of the corporation's gross receipts from passive sources, such as interest, dividends, RENT, royalties, or proceeds from the sale of securities. This provision has several conditoins, so be sure to clearly understand how it may affect you if you company expects income from these sources.
Limited Liability Company
LLC's are still a relatively new and highly touted business entity. It is similiar to an S-Corp without its restrictions. In an LLC, owners are referred to as members. The loss of a member through death, retirement, or resignation can result in the dissolution of the business. However, like a corporation, an LLC offers some protection for personal assets from business creditors. An interesting characteristic is the lack of limitation on the number and nature of its members. However, most states will require at least two members to form an LLC.
Advantages:
1. profits and losses pass through the company to its owners for tax purposes
2. personal assets are protected from business liability
3. there is no limitation on the number or nature of owners
4. an LLC is simpler to operate than a corporation
5. LLCs are not subject to corporate formalities
6. Owners may participate in the management of the business
7. Some tax advantages result from business losses or high profits
Disadvantages
1. an LLC may be recognized differently in different states
2. limits of liability have not been extensively tested in litigation
3. legal assistance is needed to properly set up and structure an LLC
ENJOY!
Feb 14 '08, 07:08 AM
