There are many reasons to set up business entities before starting to sell products.
SUMMARY
- There are 3 main entities: C-Corp, S-Corp, and LLCs.
- The business may be considered a sole proprietorship or partnership without filing to be a legal entity.
- See CONSIDERATIONS OF BUSINESS ENTITIES.
CORPORATION
Corporations are separate entities from the owner. Setting up a corporation will help to protect the owner’s personal assets from certain liabilities as it is a separate entity. There are some considerations to be cautious of to make sure there is no “piercing of the corporate veil,” or liability passing to the owner.
There are two main types of corporations: C-Corp and S-Corp. The main differences of a C-Corp and S-Corp are on the taxation, ownership, and formation.
Formation: C-Corp is the default corporation. To apply as an S-corp, there is another form that needs to be filed.
Taxation: That is the C-Corp will receive double taxation, through the corporate income and taxes through dividends. For S-Corporations, it will be taxes through personal tax income.
Ownership: In C-Corp corporations, there can be unlimited shareholders and can have multiple type of shares. In S-corporation, there are limitations to the amount of shareholders and only one type of shares.
LLC
Limited Liability Companies are similar to corporations where it helps to protect the owner’s from liability up to the amount invested into the business. This business is also a separate legal entity and there is also potential to “pierce to corporate veil” in this case as well.
Formation: An LLC is formed when it is filed with the secretary of the state, similarly to Corporations.
Taxation: LLCs are flow through entities where the income is taxed when it is passed to the individual members. LLCs can also elect to be taxed as corporations or partnerships.
Ownership: There can be an unlimited amount of owners, however, there needs to be approval when selling an interest to another individual.
SOLE PROPRIETORSHIP/PARTNERSHIP
Sole Proprietorship are when the business owner is the sole owner. Partnerships occur when there are two or more individuals intend to start a business together. There is not any filings to form either type of entities, however, there can be a partnership agreement to memorialize the partnership.
There is no liability protection similar to those in Corporations and LLCs as they do not have their own legal entity.