The Top 3 Ways to Form a New Company in the US

When starting a new business, you have several options as to the legal structure of your company. The most common option is to be a sole proprietor, but there are other structures that may be more advantageous for your specific situation.

In this blog post, we will discuss the three most common types of businesses in the US: sole proprietorships, LLCs, and C Corporations. We'll go over the benefits and drawbacks of each one so that you can make an informed decision about which is best for your business.

Advantages

• Simplicity - Filing taxes as a sole proprietor is a lot easier to do. you can complete all your requirements with your own annual 1040 form you’d file anyway.
• No incorporation - there is no need to set up a legal entity or pay annual fees when operating as a sole proprietor.

Disadvantages

• Liability - as sole proprietor, you will be required to pay all debt incurred by the business, even if it means paying from your personal savings.
• Name - as a sole proprietor, you’ll do business in your own name and not a company name which can often look unprofessional.

An LLC or limited liability company is an easy to form business entity that can help protect you through the life of the business.

Advantages

• Limited liability - like the name suggests, an LLC protects your liability as an owner, meaning: Only the LLC is liable for the debts and liabilities accumulated by the business - not the owners.
• Multiple owners - an LLC allows your business to have multiple owners, commonly referred to as “members”
• Simple tax structure - an LLC is a “pass-through” entity. This means the profits are passed to the owners and they pay their individual income tax on those profits, same as you would on a salaried job.

Disadvantages

• Annual Report - generally, an LLC is required to fill a report every year to provide your state with important details about your business along with any changes that may have happened during the year.
• Fees - the average annual fee for an LLC is $90 a year and you may have additional expenses like paying an attorney to assist you in filing.

A C corporation is a more complicated to form, flexible business entity that is usually used by larger businesses.

Advantages

• Limited liability - like an LLC, a C corp protects your liability as an owner, meaning: Only the company is liable for the debts and liabilities accumulated by the business - not the owners.
• Multiple owners - a C corporation allows to issue shares (units representing a stake in the business) to other people, so it is very easy to add a new owner or transfer and sell your stake in the company.
• Easier to seek investment - because it is easy to issue new shares, and it being the gold standard for larger business, investors usually prefer investing in a C corp.
• Tax advantages - Operating as a corporation may add additional complexity, but it can also provide a wide array of tax planning opportunities in the future.

Disadvantages

• Double taxation - when operating a corporation you pay taxes once when the company makes money and again when the money is distributed to shareholders. Though this can often actually result in lower taxes, it adds more complexity and reporting requirements.
• Fees - running a corporation is more expensive than an LLC: your annual fee is usually higher, you’ll usually be charged more by lawyers and accountants due to the higher complexity, and those charges can add up fast.

S Corporations have become a very popular way to set up a corporation. An S corporation is a designation given to an existing corporation that has less than 100 shareholders and that had incorporated domestically, under the IRS’s S Subchapter. The S corporation status allows businesses to enjoy the tax treatment of a partnership or LLC.

Earnings aren’t taxed at the corporate level, and no federal corporate tax is charged. Profits (and losses) are passed to shareholders, to file in their personal reports and pay taxes at their ordinary income tax rates. This allows the company to enjoy the strong protections afforded to a corporation, liability protection, as well as ownership, and management advantages while avoiding double taxation.

LLCs and S Corps share a lot of the same attributes: liability protection for their owners, allowing them to protect their assets and also allowing owners to avoid double taxation. While LLCs are easier to form and maintain and are usually used by small businesses, they are ill-suited for a larger business that might like to raise funding and sell shares. This makes S corporations a popular choice for midsize companies looking to grow, take on debt, and raise funds.

There are many ways to incorporate, and you should choose the that works for you. As always, you should consult with a lawyer for further information about the particular state and industry rules that pertain to your company's operations, so you can choose the best option for your business.