Similar to sole proprietorships, partnerships are extremely easy to set up and maintain, requiring no government fees or annual state paperwork. On the downside, you and your partners are each held fully responsible for all of your company’s debts. This means if you or one of your partners defaults on a company loan, creditors can go after your personal bank accounts, property holdings and other assets to satisfy the entire loan.
As a partnership, you are also at a disadvantage when it comes to raising funds. For example, you cannot raise capital by selling stock, and private investors may be wary of investing in your company without personal liability protection. Finally, just as with sole proprietorships, your company name is not protected. This means any new or existing business could incorporate using your company name.
Corporations are the standard for many businesses in today’s market. The primary reason is that incorporating shields you and the members of your company from personal liability. In other words, if your business hits hard times, creditors cannot go after your personal assets to make up for any company shortfalls.
But protection from personal liability is not the only benefit that comes with incorporating. The corporate business structure also offers significant tax savings, greater business flexibility, company name protection and increased opportunities for raising capital. You can also choose to set up your corporation as either a C-Corp or an S-Corp in order to take advantage of different tax options.
One thing to keep in mind - corporations do require some initial set up fees and a certain amount of regular maintenance. For example, you’ll have to keep up-to-date corporate records as well as file an annual report with the state.
If you’re ready for the big time and want to sell shares of stock in your business, consider a C Corporation. All publicly-traded companies are C Corporations which are considered a separate legal entity from the owners (also called the shareholders or stockholders) of the business. Because of this, the shareholders are not responsible for fees, liabilities and losses associated with the business.
The stock money and assets earned by the corporation belong to the corporation. Dividends are distributed to shareholders under the direction of the corporation’s shareholder-elected Board of Directors. Stockholders then pay taxes on the earned dividends, and the corporation also pays taxes on all profits (known as “double taxation”). To become incorporated, you basically fill out the appropriate documents for the state and have all shareholders vote on overall corporate management, stock shares, the name of the company, business industry and other key guidelines.
As a C Corporation you will need to hold annual stockholder meetings and keep meticulous records to avoid legal and accounting problems. In addition, forming a corporation is an intricate process, so we highly recommend that you find a good attorney or consultant to assist you.