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To incorporate or not to incorporate? What legal entity to choose for my business

A corporation, governed by the laws of the state in which it has established its headquarters, is considered by law as a single entity, separate and apart from its owners. A corporation can be taxed, sued, and enter into contractual contracts. The owners of a corporation are its shareholders, who elect the members of the board of directors to oversee the most important policies and decisions of the company. The corporation has a life of its own and is not dissolved in the event of a change in ownership.legal entity

Advantages of a corporation .

  • Shareholders have limited liability with respect to debts or lawsuits against the corporation.
  • Generally, shareholders are only responsible for investing in company shares. (However, it is important to mention that managers could be subject to liability for their actions, such as not withholding and paying their employees’ taxes.
  • Corporations can raise more capital through the sale of their shares.
  • A corporation can deduct the cost of the benefits (benefits package) that it offers to its directors and employees.
  • If you meet certain requirements, you may be inclined to file as an S corporation. This selection allows the company to be subject to a tax payment similar to that of a partnership.

Disadvantages of a corporation

  • The onboarding process requires more time and money compared to other organizational models.
  • Corporations are supervised and subject to the rules of entities: federal, state and some local, and therefore may have to comply with many more requirements and administrative documents to demonstrate their compliance.
  • Incorporating a business could result in paying more taxes. Dividends paid to shareholders are not deductible as a business expense, so such income may be subject to double tax.

Corporations Subchapter Type S.

· It is only a selection for the payment of taxes, this option allows a shareholder to consider their income and profits as profit sharing, thus allowing them to declare them directly in their personal income tax return. The peculiarity of this situation is that if the shareholder works for the company and if it makes a profit, a salary must also be paid, which must meet “fair compensation” standards. The foregoing may vary according to the geographic region, as well as your occupation, however the basic rule is to pay yourself the same as you would pay a third party to carry out your work, as long as there is a sufficient profit. Otherwise, the IRS [Servicio Tributario Interno de EE.UU.] You can reclassify all income and earnings as wages, making you liable for taxes on the total amount of your payroll.

LIMITED LIABILITY COMPANIES (LLC)

A limited liability company is a company with a relatively new hybrid structure that is now recognized in most states. And it is designed to offer the characteristics of a limited liability corporation, while enjoying the tax efficiency and operational flexibility of a partnership. Even though its formation is more complex and formal than in the case of a general society.

The owners are members and the duration of an LLC is normally determined when the organization documents are filed. If so desired, the expiration period can be extended, through a vote by the member members at the time of expiration. An LLC cannot have more than 2 characteristics of the four possible by which corporations are defined. Limited liability in terms of total assets, the ability to extend the maturity period, centralized administration, and the ability to freely transfer property interests.

In short, you need to carefully consider all the information before deciding which property model is best for you. Use the services of your key advisors to assist you in this process.

Via: US Small Business Administration.