any people start businesses as a sole proprietor, operating under their own social security numbers and reporting their income on their personal tax return. However, given the ease with which you can incorporate a business and the protections that it offers you, it is well worth going through the process.
The primary reason for incorporation is to protect the owners from liability in the case of bankruptcy or a lawsuit. Once incorporated, a business is seen as a separate “person” from the owner in the eyes of the court. The owner or owners are not liable for the debts and/or obligations of the company (unless they have provided personal guarantees). Florida LLC filing fee
Other reasons for incorporating are more positive. Once incorporated, the company can be sold or transferred to another entity. Additionally, a retirement plan, such as a 401K, can be set up more easily under a corporate umbrella. Employees can more easily be provided with healthcare and other benefits available only to incorporated businesses.
Types of Incorporation
A C Corporation provides a higher level of personal liability protection than a Limited Liability Company or Limited Liability Partnership. This type of corporation is taxed as a separate entity. Owners of a C Corp are called shareholders and they receive their payments from the company in the form of dividends. This leads to a double taxation penalty as the corporation is taxed as an entity for its income, then each of the shareholders is taxed based on the dividends they receive.
An S Corporation provides the same level of liability protection as a C Corp, but limits the number of shareholders to 75. The process for filing for an S Corporation is the same (at least in Maryland) as a C Corp.
Limited Liability Company
An LLC is designed to provide liability protection, but allow the income and losses to flow through to the members (owners) based on their ownership percentage. This form has minimal paperwork and is generally considered the preferred form for a business that is just forming and not planning on raising capital from shareholders.
There are also General Partnerships, Limited Liability Partnerships, Limited Partnerships, and Limited Liability Limited Partnerships, but these will not be covered in this article.
Forming the Corporation