Incorporating your company helps separate your personal identity from that of your business. Sole proprietors and partners are subject to unlimited personal liability for business debt or lawsuits against their company. Creditors of the sole proprietorship or partnership can bring suit against the owners of the business and seize the owners' homes, cars, savings or other personal assets. Once incorporated, the shareholders of a corporation have only the money they put into the company to lose, and usually no more.
S Corporations vs. LLC's
S corporations and LLCs possess similarities: They both offer their owners limited liability protection and are both pass-through tax entities. Pass-through taxation allows the income or loss generated by the business to be reflected on the personal income tax return of the owners. This special tax status eliminates any possibility of double taxation for S corporations and LLCs. That's where the similarities end.
The ownership of an S corporation is restricted to no more than 75 shareholders, whereas an LLC can have an unlimited number of members (owners). And while an S corporation cannot have non-U.S. citizens as shareholders, an LLC can. S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs or partnerships. LLCs are not subject to these restrictions. LLCs are also more flexible in distributing profits than S corporations. S corporations can only have one class of stock and your percentage of ownership determines the percentage of pass-through income. On the other hand, an LLC can have many different classes of interest, and the percentage of pass-through income is not tied to ownership percentage. The pass-through percentage can be set by agreement of the members in the LLC's operating agreement.
The advantages and flexibility of a general corporation over either of these entities usually outweigh the advantages of a LLC or S corporation. For those situations which an LLC or S Corp make sense exit strategies should also be in place when deciding which entity to form.
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**Information on this site is not intended as and shall not be construed to be LEGAL ADVICE. When dealing with legal matters, you should always avail yourself of the services of a qualified member of the Bar Association.
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Xtreme Business Solutions, Inc.
3838 Raymert Drive #3
Las Vegas, Nevada 89121
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