Before you decide what type of legal structure is best suited to your business, you should be sure to speak with a business attorney at a corporate law firm serving San Jose . There are a number of important factors that should affect your decision, and it’s important that you take the time to understand each of them.
One rule of thumb is that if you are going to plan to take out cash on an on-going basis, you should consider choosing an entity that isn’t separately taxed. If, however, you plan to build a company where you will constantly reinvest profits and make all of your money when you sell your company (or take it public), a C corporation is something you should consider. Here is a guide to the most common structures chosen by startup companies—and some of the things you should keep in mind when you make your decision.
A C corporation is a type of corporation which is taxed separately from those who own it. Unlike S corporations and limited liability companies, owners of a C corporation which receive dividends will be taxed twice—once at the corporate level and once at the individual level. This means that their income will not be taxed as self-employed income.
An S corporation is a type of corporation in which the profits pass directly through to the owners or shareholders. These profits are only taxed at the individual level. Having an S corporation allows you to avoid the double taxation that comes with being a C corporation. As with a C corporation, shareholders in an S corporation will not be subject to self-employment taxes. Ownership requirements for S corporations are stricter than those for C corporations or LLCs and therefore limit outside funding opportunities.
Limited liability companies
A limited liability company—or LLC—is structured like a partnership, but has limited liability like a corporation. Like an S corporation, the owners of a limited liability company will only be taxed once—at the individual level—for all earned income. However, they will be subject to the self-employment tax.