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When a person is ready to run their business and start earning from it, it becomes important for them to register their business with the government after choosing a business entity type. In case the business owner chooses not to remain as a sole proprietorship or partnership, they would have to incorporate their company. Incorporation of a company refers to the legal process that is used to form a corporate entity or a company. Unlike a sole proprietorship or a partnership, an incorporated company is a separate legal entity from its owner.

Which business type is best for tax purposes?

There are two kinds of business entities LLCs and INCs – S-Corporation, and C-Corporation. Both C-corp and S-corp are corporations and are filed the same way. When a corporation is formed, it is considered to be a C-corp. You can then elect to be taxed as an S-Corp. Each kind of business entity and their taxes have been shared below:

C-Corporation Taxes:

  • A corporation is taxed normally at both the corporate level and the personal level. This means that the profits of the company are first taxed at source and then the dividends given out to the shareholders are taxed in their personal income tax returns. This is called double taxation.
  • Corporate taxes are much lower than personal taxes which is why some business owners tend to choose this kind of business entity.

S-Corporation Taxes:

  • The S-Corporation has its profits flow directly to the shareholders of the company, which is then taxed at the personal level. This is called pass-through taxation. This allows the profits of the company to be taxed only once.
  • S-corps offer the ability to limit the self-employment tax which can result in considerable self-employment tax savings.

Limited Liability Companies (LLC) Taxes:

  • By default, a single-member LLC is taxed as a sole-proprietorship (owner is taxed for the profits earned in his/her personal return) while the multiple-member LLC is taxed as a partnership.
  • LLCs are just like S-corporations and offer pass-through taxation, which means that the profits of an LLC are taxed just once.
  • The LLC can choose to be taxed as a C-Corporation or an S-Corporation. This means it has multiple options in terms of taxation.
  • It is extremely flexible in how it distributes profits and how they are taxed.

What type of business entity is best for me?

Choosing an entity type is very important because it depends on three main factors: record-keeping, taxation, and liability. Your selection would however be based on your company goal as every type has its own advantages. Here are the common forms of business entities:

  • Sole Proprietorship: This is the most common kind of business organization. It is easy to form and provides complete managerial control to the owner. But there is no limited liability protection and so it is not a credible business entity form.
  • Partnership: This involves two or more people who agree to share in the losses and profits of a business. All the profits are divided and then are taxed through the individual income tax returns. And just like the sole proprietorship, the partnerships have no limited liability protection and so this is also not a credible business entity form.
  • Corporation: This is a legal entity that is created to conduct business and is separate from the owner unlike the partnerships or sole proprietorships. The main benefit of this business entity is that it offers personal liability protection. But it also comes with complex requirements to keep the business running. Based on the way it can be taxed, there are two kinds of corporations:
    • C-Corporation: the profits are taxed at the corporate level and when the dividends are given out, it is again taxed at the individual level, causing double taxation.
    • S-Corporation: You can elect to be taxed as an S-corporation where the profits are taxed at the individual level only.
  • Limited Liability Corporation (LLC): It offers liability protection and fewer complexities as compared to the corporation. And it can easily mimic the tax status of the s-corp and c-corp, where you just need to notify the IRS on how you want to be taxed. This makes it highly popular amongst small businesses

Making your choice here would be entirely based on your business goals. So, do take the help of a professional if you are confused. Contact us today!

How do I keep my LLC and Corporation compliant?

It is very important to keep your LLC and corporation compliant to the rules since if you fail to do so, you will lose all the benefits it has to offer including the protection of personal assets and tax-deductible benefits. There are both external and internal ongoing requirements that need to be met by the company to stay compliant based on the type of business structure you have. Each has been explained below.

Internal Requirements

These are the actions that have to be taken within the company by the shareholders and directors (for the corporation), or members and managers (for the LLC). The internal events have to be documented in the company records to be used in an event of a lawsuit or when selling the company. These include:

  • Corporations: Both the C corporations and S corporations have the strictest internal requirements, which include holding initial and annual director and shareholder meetings, adopting and maintaining updated bylaws, issuing stock to shareholders, and recording all stock transfers.
  • LLCs: Even though it is not required for the LLC, it is highly recommended that you maintain an updated operating agreement, issue membership shares, record all membership interest transfers and hold annual meetings of members and also of managers, if the LLC is manager-managed.

The external requirements are imposed by the state where your business has been incorporated. Here are the things you need to take care of:

  • Annual reports: This is used by states to track formed or qualified corporations and LLCs. You will have to file the annual report with the state and pay the required fee which is different for every state. Visit your state’s Secretary website to get details on it.
  • Franchise tax: A few states need you to pay a franchise tax for getting the privilege of operating as a corporation or LLC in that state. Each state has a different way of calculating the tax, check the state’s official website to know more. You can also read more about Delaware Franchise Tax in our article.

Remember there are deadlines to the filings and they have to be done before the date to avoid penalties.

Which state is best to form my LLC or Corporation?

Unless and until you plan on having a large, multi-state operation, it is always better to have your company formed in the state in which you are located. But if you still decide to open your company in another state, Delaware is a great choice especially if you are planning to make your company go public in the future. Delaware allows you to expand and grow into a huge empire.

Another state other than Delaware that offers a lot of benefits is Nevada. Nevada is more than the lights and glitz. It has been growing into a business hub really fast due to the pro-business environment. In fact, Nevada is called a tax haven as it has no business income tax, franchise fees, capital gains tax, state corporation tax, or inheritance tax. Basically, no tax at all. The reason why this state is offering a lot is that the powers know they will get back all of the money when you take the roulette wheel for a spin! We understand that the requirements for each new start-up or entrepreneurship are different and so are the procedures to start a business in Nevada.

Wyoming is also a hidden jewel to start a business in. Apart from the great living benefits it offers, Wyoming is also a tax haven just like Nevada. The benefits include no business or franchise taxes of any sort. The offices here are also allowed to maintain their privacy and remain anonymous. One advantage that Wyoming offers and Nevada doesn’t is that it allows for what is called a “lifetime proxy.” A proxy is someone you elect to vote on your behalf. This means that you can hide your identity by having someone else hold your stock and control the vote by having a lifetime proxy over them.

But again, in the end, you need to choose the place where your company will grow and based on your convenience.

Do I’ve to put “LLC” or “Inc” in my company name?

Yes, it is important to add an “LLC” or “Inc” after your company name if it is a limited liability company or a corporation respectively. However, no state requires a corporation or an LLC to use a comma in separating the business name from the business designation. As a business owner, you will have to register your company with the state, rather than with the federal agencies.

Due to this, the LLC and corporation naming regulations may vary slightly in each state across the nation. But yes, most of the states do need you to add the word or phrase incorporated, Inc., corp.—or limited liability company, LLC or L.L.C. In fact, when you are filing the articles of organization for the LLC or the articles of Incorporation for the corporation, the state needs you to add the designator in the name such as “LLC” or “Inc” to signify the company’s type of formation.

If you miss out on adding these words, it can have unintended consequences for you (the business owner) not only when filing for registration but also when performing any transaction for the company. In case you miss out on the designator, it would make the court rule the company to have entered into a transaction in an individual capacity, and not on behalf of the company. This can result in personal liability for the owners. So, yes, it is very important to add the designator for the company. To know what kind of designators you can use, check out your Secretary of State’s website.

What documents do I require to open my business bank account?

Every bank will need documents that verify the owners and the company’s registration with the government. Here is the list of documents that you will have to present for each kind of business for which you want to open a business account:

Sole Proprietorship Business Bank Account Requirements

  • Personal identification: Social Security number (SSN) & two forms of personal ID (valid forms include a driver’s license, passport, and Social Security card.)
  • Fictitious business name certificate: This certificate is also known as the “doing business as” certificate (DBA certificate), if your business operates under a different name from your own.

Partnership Business Bank Account Requirements

  • Business identification: You federal employer identification number (EIN) and a copy of your articles of organization.
  • Organization documents: This includes your business partnership agreement and any other organization documents that you have.
  • A signed declaration of unincorporated business and any required business licenses.

Corporations Business Bank Account Requirements

  • Business identification: Your federal EIN.
  • Articles of incorporation and corporate charter
  • Corporate resolution signed by all of your officers as well as a signed signature card by the account signers.
  • Business licenses, if any.

Limited Liability Company (LLC) Business Bank Account Requirements

  • Business identification: You federal employer identification number (EIN) and a copy of your articles of organization.
  • Organization documents: This includes your business partnership agreement and any other organization documents that you have.
  • A signed declaration of unincorporated business and any required business licenses.

Note: Some banks can ask for extra documentation other than those mentioned here. So, be prepared and call us before time to know what documents you will need to get for the meeting to open your bank account.