The previous article discussed sole proprietorships, general partnerships, and limited partnerships. For designers looking to take their business to the next level, this article provides an overview of different types of corporations.
For businesses, forming a corporation is the next step up the evolutionary ladder. There are several different types of corporations. The most common is a "C" corporation, meaning that it meets the requirements of Subchapter C of the Internal Revenue Code. A corporation is legally defined as having a separate existence from that of its founders or owners. As a separate legal entity, the corporation can conduct business, open bank accounts, and own property under its own name. The owners of a corporation are referred to as shareholders. Corporations are complex to set up and maintain, so it's best to use an attorney.
The main advantage of a forming a corporation is that its shareholders are not personally liable for the company's debts and obligations. This protection is sometimes referred to as the corporate shield or corporate veil. If the corporation cannot pay its debts and is forced into bankruptcy, the assets of the company will be liquidated but the stockholders, directors or officers will not be required to pay any shortfall with their own money, unless they have signed personal guarantees to cover business debts.
The biggest disadvantage of a "C" corporation is that it's subject to what is often called "double taxation." Business profits are taxed first at the company level, then again at the individual level if they are distributed to shareholders.
To avoid this double taxation, corporations can make a special election to be taxed as a "pass-through" entity under Subchapter S of the Internal Revenue Code. "S" corporations are most appropriate for small business owners and entrepreneurs who want to be taxed as if they were sole proprietors or partners. The corporate profits pass through to the owners, who then pay taxes on the profits at their individual tax rates.
Limited liability company
The limited liability company, or LLC, is the most recent business format to be offered and there are different versions in different states. Its popularity has grown very quickly because it represents a great combination of benefits: it's less complicated to set up than a corporation; it offers protection from personal liability for business debts and claims; and business profits are taxed only at the personal level. For these reasons, it's now the preferred business structure for design entrepreneurs.
Seek expert advice
To choose the right legal format for your business, it's important to also seek out expert advice. Ask your attorney and your accountant for guidance on this important issue.
Did you find this column helpful? Click here to rate it!