Deciding on the best company structure for a new endeavor can be a daunting process due to the confusion that it poses and the multiple options out there.
People often wonder whether a particular structure will offer enough benefits and is worth any of the potentially additional administration. The small business corporation is a popular option.
There are a number of benefits associated with this structure. To start with, all owners will receive personal liability protection afforded by the corporate entity. This protection has been established and enforced by the court system for over a century now. For the greater part of the business world, incorporation was the only choice for obtaining this essential need.
Big corporations like Walmart and Ford were all once small businesses.They have been able to grow in part because of the protection they have had all this time by running their businesses through asset protecting vehicles like the corporation.
While this protection is essential in today’s business environment, it is not an absolute protection. You should still get insurance and owners may end up being asked to personally guarantee business debt at the initial start up of your company.
This legal entity also provides an excellent structure for taking on investment so if you plan on raising money for expansion, the corporation is ideal for facilitating an equity transaction. Because it is a separate being under the law, it is able to establish its own credit as well. Over time, banks will lend money to the company itself without requiring any owner involvement.
It also comes with a standard built in governance structure. The small business corporation will be managed by a central body called a Board of Directors. The Directors can appoint officers who will be tasked with running the day to day business.
While a corporation by default is subject to the double tax structure of a C corporation, it can qualify for a single layer of taxation by making what is known as an S election to the Internal Revenue Service. Not all small business corporations will qualify. Check with your accountant.
Another benefit is that you can more easily sell a business. Because the entire business is within this separate legal entity, it is easier to sell the company because you can just issue the ownership of the corporation to the new owner. Ownership is generally represented by shares.
Many entrepreneurs ponder over whether to use a limited liability company instead. The LLC is more popular for the standard small business which is owned by one or just a few owners. It is a more simple and more flexible option.
However, if you plan on growing an expanding business, operating in several jurisdictions, taking on third party investors, or going public someday, the small business corporation is the better option.