(Welcome, welcome, welcome! It’s time once again for that most fun day of the week, Small Business 101 Day! Yes, it was getting boring calling the day after Monday something like Tuesday, so from now on, I shall refer to it as, Small Business 101 Day! Think it’ll catch on? Well, probably not. But that doesn’t mean I can’t still share some good business related advice.)
Q: Wait, why do I need to know about any corporations other than LLCs?
A: While LLCs are useful structures for small businesses, particularly those that only have one member who wants the legal protection that a corporate structure can provide, they do have limitations. One of the biggest of these limitations is that other corporations, unlike LLCs, are able to issue shares of themselves to the public, as a means of raising money and spreading control of the corporation. There are also rules in some states that will dissolve an LLC after a set period of time or upon the death or bankruptcy of one of the members of the LLC, making it harder to maintain the structure for an extended period of time.
Q: Alright, what about a C corporation structure, then?
A: A C corporation is what many people think of when they hear the term ‘corporation.’ They have to follow very specific rules about filing status, must elect a board of directors, and are required to hold annual meetings. They are also subject to double taxation on profits; the money earned by corporations is taxed when it is earned by the company, and again when the money is distributed to shareholders as dividends.
Q: Yikes, that’s pretty rough; why bother with a C coporation at all?
A: One word – stocks! Yes, unlike LLCs, having a corporate structure enables your business to issue share of stock. Besides being a way to raise money for your business, you’ll also be able to distribute stock to employees for compensation as well as being able to sell your own shares for the purpose of diversification.
Q: Oh, that makes sense; where do S corporations come into play?
A: S corporations are a sort of compromise between C corporations and LLCs. They have many of the same requirements as C corporations in terms of having a board of directors and holding annual meetings, but they don’t have to deal with double taxation. By meeting certain qualifications, the S corporation can avoid taxation at the corporate level.
Q: Cool! How can my business become an S corporation?
A: Well, once you have a corporation, you can elect to have it become an S corporation as defined by the IRS. Your corporation will need to have only one classification of stock with less than one hundred share holders, who all must be natural persons (no corporations, partnerships, or other legally created entities). Assuming your corporation can meet all these requirements, it can elect to file as an S corporation; if later one of those requirements is not met (if, for example, your corporation goes over one hundred shareholders).
Q: All of this is interesting, but do I really need to know all of this information about corporations?
A: Well, besides being interesting in itself, if you have a small business, you’re probably hoping to expand it one day. When you do, you’ll be confronted with issues about which type of corporation you’ll eventually choose for your business. Knowing what types of corporations are available, as well as the advantages and disadvantages of each, will help you to make the best decision possible. Hence, my goal in attempting to educate and entertain you. A good overview on several of the main corporate structures can be found here.
That’s it for this time; come back again for more helpful hints on starting your own small business.