Choosing the right business structure is one of the most important financial decisions you'll make as a business owner. Whether you're starting your first company, branching out with a subsidiary, or looking to restructure an existing business, the entity you select will influence everything from your taxes to your legal liability. There's no one-size-fits-all solution. The best option depends on the size of your business, how it's funded, and your long-term goals. Before you make a decision, it's smart to understand the basics of the three most common structures: LLCs, S-Corps, and C-Corps.
LLC, S-Corp, or C-Corp: What's the Difference?
- A Limited Liability Company (LLC) offers you flexibility and simplicity. Profits and losses pass through to the owners, which means income is taxed on your personal return. You also benefit from personal liability protection. LLCs don't have strict ownership rules and require less paperwork than corporations. In some cases, an LLC that elects to be taxed as an S-Corp can lead to savings on self-employment taxes.
- An S-Corporation (S-Corp) is a popular option for small to mid-sized businesses that meet specific IRS requirements. Like an LLC, it allows income to pass through to your personal tax return. One major benefit is the ability to pay yourself a reasonable salary and take the rest of your earnings as distributions, which may be taxed at a lower rate. That said, S-Corps come with limitations on ownership and require more ongoing formalities.
- A C-Corporation (C-Corp) is a separate legal entity that pays taxes on its income. It's usually the best choice for larger businesses or those seeking outside investment. C-Corps can have unlimited shareholders and multiple classes of stock. While they're subject to double taxation (once at the corporate level and again on dividends), they offer more options for raising capital and expanding over time.
Key Factors to Consider Before Choosing a Structure
Ask yourself these questions before making your choice:
- Are you a solo entrepreneur, or do you have partners or investors?
- How much growth do you anticipate in the next few years?
- Are you planning to raise capital or bring in silent partners?
- How do you want to handle taxation: on the business level, personal level, or both?
- Do you need the flexibility to restructure in the future?
Getting the structure wrong can create tax burdens or limit your company's potential. That's why it's so important to choose with care and also revisit that decision as your business evolves.
Can You Restructure an Existing Business?
Yes, you can restructure an existing business -- and it might be the smartest money move you make. Many business owners switch structures as their company changes. A one-person business that's grown might save money by becoming an S-Corp for tax reasons. Other companies find that switching to a C-Corp makes more sense when they want to bring in investors or are planning to pass the business to someone else.
How a CPA Can Help You Make the Right Choice
Choosing or changing your business entity isn't just a paperwork decision; it's a strategic financial move. A CPA can help you weigh the pros and cons of each structure based on your company's revenue, industry, and future plans. At Myrick CPA, we take the time to understand your business goals before offering personalized advice.
Let's Talk About Your Company's Path Forward
Your business entity influences more than just taxes. It can impact how your company grows, how you attract investors, and how much of your income you get to keep.
If you're ready to make the wisest decision for your company's future, contact Myrick CPA to schedule a consultation. Let’s get together to build a strategy that works for you.
