Understanding Corporate Entities.
For many people, starting and running their own business has been a lifelong goal. It can be exciting to think about creating something from the ground up. It can also be overwhelming and difficult to understand all of the processes and formalities to starting a business. A key part of starting a business is to determine what type of entity your business will be; making this determination will help protect the business owner from financial liability in the event of any legal challenges. There are basic differences between the six major corporate entity types.
A C corporation, or a standard corporation, is a separate legal entity that is owned by shareholders. Having a C Corporation structure limits the shareholders’ (or owners’) liability for debts incurred by the business. This limited liability generally means that if the corporation owes a debt or is sued, then those obligations will be paid with the money or assets that belong to the corporate entity, not those that personally belong to the individual owners. C corporations can have an unlimited number of shareholders. Owners are generally required to comply with state filing requirements.
An S corporation is also a standard corporation. The major difference between a C corporation and an S corporation is that an S corporation has a special tax status with the IRS. For C corporations, corporate income is double-taxed: once when the corporate income tax return is filed, and once when shareholders file individual tax returns. With an S corporation status, there is no corporate income tax. The income is only taxed on the individual shareholders’ tax returns. S corporations cannot have more than 100 shareholders. Owners of S corporations are generally required to comply with state filing requirements.
Limited Liability Companies
An LLC, or a Limited Liability Company, is an alternative to the corporate form. An LLC offers limited liability protection (similar to the limited liability for corporations) and only taxes income at the individual level rather than at the entity level. LLCs also differ from corporations by requiring fewer formalities and obligations. LLC owners are generally required to comply with state filing requirements.
Partnerships are business entities owned by two or more partners. There may be no limited liability depending on how the entity is arranged. If there is no entity protection, the owners are liable for any debts or actions of the partnership. Partnerships are not a separate entity from the owners. Income and earnings of the partnership are taxed on the owners’ individual taxes, as the partnership is not considered a distinct entity from the owners. General partnerships are formed by agreement, and are not required to file formal paperwork.
In a sole proprietorship, there is a single owner. There is no limited liability, and the owner is responsible for any debts or liabilities incurred. There are few formalities involved with a sole proprietorship, so it’s easier to start, and if a business grows under this model, the owner may elect to change into a different entity – and gain liability protections – in the future.
There are a variety of factors that go into determining which corporate form is right for you. Each type of entity carries with it distinct benefits and obligations. If you or a loved one is considering starting your own business in Salt Lake City, Logan, Weber County, or anywhere throughout northern Utah, or are currently running a business and has questions about corporate liability, it is important to have an experienced business attorney that can help you understand your options.Contact the Logan, Utah business lawyers of Harris, Preston & Chambers, LLP for a consultation today.