Should you structure your business to be a sole proprietorship, LLC, or corporation? Where should you incorporate? Learn more about the different structures and which is the right one for you right now.
C Corporations are taxed as entities separate from their shareholders. The corporation pays taxes, and you pay taxes as an employee. Investors are taxed on the dividends they receive. Salary paid to you and other shareholders must be reasonable, or a portion of it may be reclassified as a nondeductible dividend payment. If earnings are accumulated beyond the corporation’s reasonable needs, an additional tax may be imposed on these earnings.
S Corporations may have between 1 and 100 shareholders, which can include individuals, estates, certain trusts, and tax-exempt organizations. Income and losses are passed through to shareholders, thus avoiding the double taxation inherent in a C corporation. However, S corporations are governed by strict rules.
Partnerships also avoid corporate double taxation and usually allow more flexibility in distributions than either a C or S corporation. Family limited partnerships (FLPs) offer many benefits: You can split income with your children and realize estate tax savings, while continuing to control assets transferred to the partnership. However, it is important to ensure that the FLP is carefully structured, as the IRS monitors FLPs closely.
LLCs and LLPs offer pass-through taxation and limited liability. They have a flexible structure, which allows any entity to be an owner, including a corporation; investments in other entities are not limited. Special allocations of income and losses are possible.
Sole proprietorships report business activities on personal income tax returns. If you risk substantial liability in your business, consider some form of incorporation, LLC, or LLP to protect your personal assets.
Consider whether you should you be a non-profit or a for-profit.
SBDC has FREE and low cost marketing courses to help you create a name for your business that aligns with your overall strategy.
Registering your company name is an optional step that will help protect the identity of your business. It ensures that similar businesses types can’t register the same name. Registration fees vary based on your type of business, location, and number of employees.
If you have chosen a name and want to make it official, register your FBN with the County of Los Angeles so you can start "Doing Business As" (DBA) your company.
Applying for a fictitious business name (FBN) is the first piece of paperwork that you'll file for your business. It's best to finish writing a business plan, planning your finances, and selecting a location before you file. The application isn't free and you'll have to file more paperwork if you want to change your name later.
If you hire employees, you must apply for a Federal Employer Identification Number. If your business is a sole proprietorship, a FEIN may be helpful, but is not necessary.