Selecting an Entity

There are definitive legal and tax advantages to incorporating your business. One of the biggest benefits is that you will remain personally free from liabilities and maintain protection from the business debt.

From an image perspective, you will have more credibility with your customers and suppliers. Another added benefit is that you have a less likely chance of being audited by the IRS.

Why incorporate over choosing a different entity type? Incorporation is often utilized by businesses that want to raise capital or offer stock options to employees. Incorporating the business also allows for unlimited shareholders (not applicable to S-Corporations).

Liability Protection
As a sole proprietor you face unlimited business debt. Unfortunately, if your business incurs financial difficulties, you could be faced with losing personal assets including retirement savings and your home. By forming a corporation, you are protecting those assets from the debts linked to your business.

Tax Savings
Currently self-employment tax for sole-proprietors is 15.3%. As a corporation, you only incur tax self-employment tax on the salary you distribute to yourself. Additional tax savings apply for medical and childcare costs.

Types of Corporations
Depending on your situation, we will show you which entity to establish. For a better understanding, below is a summary of each type of entity.

General Partnerships
If you want to be a general partnership with all your partners in the business, each partner will accept personal responsibilities for all the debts and liabilities of that partnership.

Limited Partnership
If your company has general and limited partners, it is referred to as a limited partnership. The general partners manage daily operations and are liable for the debts as well as the actions of the partners. Limited partners have no liability for the debts or actions of the partnership.

As the owner of a C-Corporation, you only pay personal income tax on money drawn in the form of salary bonus, etc. A corporation is a legal and tax entity separate from you - the owner, controller and manager. As a result, your corporation pays taxes on corporate profits.

An S-Corporation pays no income tax and is a regular corporation with an S-corporation tax status/election. All business profits pass through to you for reporting on your personal tax return. The benefit is that you have the limited liability of a corporate shareholder but pay taxes as a sole proprietor or partners.

Professional Corporation
If you own a medical, legal, accounting, financial, architectural or any other company that may fall under the "professional services" category, you will need to see the advice of an attorney to assure that the Articles of Incorporation convey special language and the corporation must be compliant to certain statutory provisions.

Non-Profit Corporation
If you run a non-profit, your corporation is tax-exempt and cannot pay dividends. If the non-profit is dissolved, remaining assets must go to another non-profit organization.

Limited Liability Company (LLC)
The clear benefit of forming an LLC (Limited Liability Company) are personal asset protection, expense deduction, lowering chances of getting audited, credibility with customers and vendors. IRS rules now allow you to choose between being taxed as partnership or corporation.

Professional Limited Liability Company (PCCL)
There are similarities between a Professional Limited Liability Company and Professional Corporation in terms of who qualifies. Legal advice is recommended to determine which type of entity should be applied for your company.

Limited Liability Partnership (LLP)
As a Limited Liability Partnership, your biggest benefit is that you and all the other general partners are protected from the liability for the acts your partners and employees. The same rules apply to LLPs as LLCs with the exception that the LLPs operate under partnership rules.
For a quick glance of the entity types, see our chart.