Incorporation

Business Law

Before starting a new business, the prospective business owner or owners have to decide what type of business entity is best for the company. The choice of business entity is an important decision that should be done in consultation with an attorney and an accountant.

S-Corporations

An S-corporation is a business entity that has all of the same liability protections as a C corporation or an LLC. A common misconception for many people choosing an entity for their business is that only an LLC provides limited liability. S-corporations are typically smaller businesses, having one or more shareholders, and some are family owned businesses. A separate tax identification number is required. However, one of the advantages of an S corporation is that there is no double tax. S corporations are pass through entities. This means that unlike C-corporations that are taxed at the corporate level and then again at the shareholder level, the S corporation is not taxed at the corporate level. The tax is “passed through” to the owner's personal return. Any tax owing is paid at the individual tax level. S corporations have certain restrictions in terms of who can own stock in the S corporation. However, generally for the small business, these restrictions do not apply. For instance, S corporations are restricted to 100 shareholders and shareholders must be U.S. citizens.

C-Corporations

The C corporation is a separate taxable business entity. You will often hear the term “double tax” for C corporations. What this means is that the C corporation files a corporate tax return and pays taxes at the corporate level. If the corporation distributes “dividends” to its shareholders then there is a tax on the income to the individual shareholders on their personal returns. A separate tax identification number is required for C corporations and these business entitities enjoy the same liability protections as the S corporation and the LLC.

PLEASE NOTE: Even owners/shareholders and managers of companies that are S, C or LLC’s can still be personally liable (meaning there is no liability protection) for unpaid wages, overtime wages, and state and federal penalties imposed for failure to pay all of an employees wages and overtime wages. See our discussion under Claims for Unpaid Wages and Overtime.

In order to select the best legal entity, consult with an attorney and an accountant in order to discuss all of the options and to determine what is best for you.