How do you decide what kind of entity to form for your Startup Company? There are many things to consider, such as the type of business that you're in and how much capital is involved. In this blog post, we'll go over the benefits of each entity type and help you plan your Startup's tax strategy from day one.
- Sole Proprietorship: You are the business and there is no legal separation between you and your company. A sole proprietorship doesn't offer any liability protection, which means that if anything goes wrong with the Startup Company's operations, then it could lead to a personal lawsuit against yourself as an individual. As such, this entity type is only recommended for people with a low risk tolerance as it doesn't offer any liability protection.
- LLC: This is the most popular entity type and there are many benefits to an LLC which makes it increasingly more attractive over other Startup Company setup types. For example, if you're in the United States, then this Startup Company can limit your personal exposure to liability for your Startup Company's debts, which is very important in the event of a lawsuit. Furthermore, an LLC doesn't have any "active" tax classification as it must file its taxes on a federal level and can be taxed as either a corporation or partnership depending on how you form this entity type. Contact us to be advised on which tax classification should you choose.
- Corporation: This Startup Company setup type is typically used by Startup Company's with the greatest amount of capital as it offers more liability protection than other entity types. However, this Startup Company setup comes at a price - corporations are subject to double taxes and that can be costly depending on how much revenue your Startup Company generates! Additionally, you must have an initial minimum number of shareholders who own the Startup Company's legal shares, which is part of what makes this entity type so complicated.
- Partnership: This Startup Company setup type requires at least two people to have an equal interest in the Startup and that they're actively involved with its operation. Furthermore, each partner will be taxed on their individual income as opposed to the company's revenue.
- Nonprofit Corporation: This Startup Company setup type is an entity that has been set up as a nonprofit and therefore doesn't have to pay taxes on its revenue. Furthermore, it's important to note that all of these Startup Company setups can also be taxed under Subchapter S of the Internal Revenue Code, which is only available to Startup Company's that meet strict eligibility requirements.
Now you know more about each Startup entity and how it will affect your Startup Company! If you need help to set up your business from the start, please contact us. We can help you to select suitable structured and tax classified correctly.
How we help:
Articles of Organization/ Certificate of formation
Name Availability Search
Form 2553 Filing
Business Tax Preparation
Business Tax Advisory