Starting a new business requires planning. You to have a strategy that is well thought out. And not every idea comes together in sequential order. Some companies start out with a vision, craft a mission statement, and then decide upon products or services to be offered. Entrepreneurs pull together ingenious ideas for companies and prepare their sales pitch in attempts to secure funding. They then go before capitalists, bankers, or lenders and get a host of different responses, and are oftentimes met with “no” as an answer. Persistence is key.
No doubt company founders lose sleep from worry even after having spent hundreds of hours in business development to ensure that they have in place the best chances at achieving success in their new venture. One such step, though, that isn’t talked about much is how to decide on the best business structure for the type of company they are starting and the employees who may ultimately work there. Business designations can be tricky to explore because these newly minted managers are entrepreneurs, not legal experts. However, if you’re a new business owner, there are some general questions that you can ask yourself as you begin the exploratory process of choosing the best business structure for your company type.
Types of business structures: C-Corps and S-Corps
To begin with, you must decide whether in the future you will want the general public to invest in your company to facilitate future growth. If so, you want the company to register as a C-corp with a predetermined number of shares to be issued for public trade. C-corps are familiar to all of us as large global companies with hundreds or thousands of employees. However, this isn’t always the case. Some C-corps have smaller numbers of employees and only issue a portion of total shares. They can register multiple share classes: class “A”, class “B”, and so on. Any unissued shares are called treasury stock. Further, publicly traded C-corps are required to register with the SEC and file quarterly 10-Q and annual 10-K financial reports. Otherwise, your C-corp can be a privately held company.
S-corps are different because they can be owned by one person or up to 100 individuals. S-corp owners gain the tax advantage as a pass-through entity for business profits and losses. S-corps only have one share class and owners can transfer ownership through the sale of stock. If you want the flexibility of selling part of your company’s equity, this is a business structure option to consider.
Limited Liability Companies (LLCs) and Partnerships
LLCs, or domestic LLCs, are Limited Liability Companies. For tax purposes, the IRS considers these pass-through entities. While someone may come after your company profits via a lawsuit, personal property is much more difficult for a complainant to target. You are only liable for the amount you invested in your company. When you run your own LLC, you don’t need to apply for a separate employee identification number (EIN). However, if you intend to hire employees, you need an EIN immediately.
Limited Liability Partnerships (LLPs) allow professionals to share their expertise, workload, resources, and business liability. You see these suffixes commonly displayed in the titles of law firms, accounting firms, and other licensed professionals, such as architects. Like LLCs, LLPs protect the partner’s personal assets from creditors and legal challenges. They also allow individuals to enter and exit the partnership agreement more easily. LLPs are required to file annually. Partners are required to file taxes individually like an LLC pass-through entity, except on their portion of profits.
The Tax Cuts and Jobs Act of 2017 included a provision for a deduction of up to 20% on Qualified Business Income (QBI) from a qualified trade or business for estates, trusts and individuals who are owners of sole proprietorships, partnerships and S-corps. The deduction has various components and is subject to limitations. Consulting with a seasoned tax professional to make sure that you benefit from all the current rules as well as minimize the chances of filing incorrectly should be a key step in your business planning.
Small business considerations for optimal tax efficiency
You don’t need to own a massive company to do what you do well. If this is you, then you don’t need to register as a C-corp with 1 million shares of stock on the books. Smaller companies in the range of 50 to perhaps a few hundred employees will do well structuring their business as an S-corp, LLC, or LLP. All will provide the benefits of pass-through taxation. LLCs can grow as large as you want when there isn’t a need for partnership agreements. However, some might argue that the LLC is a safer bet.
Ultimately, you are a growing entrepreneur, not an attorney. Leave the heavy lifting to those who can provide expert advice. As the owner of a new company, the best approach to take is to focus on launching your business. SD Mayer’s tax and legal team will help you to decide on what business structure will have the best tax benefit so that you can concentrate on just doing what you do best: leading the way.
The professionals at SD Mayer want your business to succeed. We will sit down with you and help plan your optimal business structure every step of the way with our decades of knowledge behind us. Contact us today to get the process started.