Once you decide to start a North Carolina corporation, one of the first things you will have to determine is the type of entity for your business structure. There are several typical entities you can choose from: (1) a C corporation (2) a subchapter S corporation (3) a limited liability company (LLC); or (4) a limited or general partnership. While each of these entities can provide owners with limited liability for business debts and obligations, there are certain differences to keep in mind.
This corporate structure is the most common type of entity. The shareholders of a C corporation have limited liability for corporate debts and obligations. C corporations are typically used by companies that wish to have a large public offering or a large number of shareholders. These corporations can issue different classes of stock and have an unlimited number of shareholders. On the downside, C corporations are subject to a double-taxation structure. What this means is that in addition to corporate profits, the IRS taxes dividends paid out to shareholders. Nonetheless, because of the flexibility in shareholder and stock structure, the C Corporation is the most attractive option for many companies.
If you are a relatively small company, you may consider incorporating as a Subchapter S corporation. A Subchapter S corporation is a corporation that that has elected a special tax status with the IRS. Unlike a traditional C corporation that is subject to a double-taxation structure, the profits of an S corporation are taxed only once. As a result, the accounting for an S corporation is generally less complicated. All income or loss is reported once on the personal tax returns of stockholders. However, S corporations have certain limitations. For example, unlike C Corporations, an S corporation is limited in the number of shareholders it can have and can only issue a single class of stock. In addition, each shareholder must be an individual who is a U.S. citizen or resident.
Limited Liability Company
Like C corporations and S corporations, a limited liability company (LLC) provides its members protection from personal liability. However, LLCs also provide several distinct advantages over corporations. For example, LLCs are not subject to all of the corporate formalities required of corporations. LLCs are generally not required to hold formal meetings or keep detailed corporate minutes. In addition, there is no limit to the number of owners. With respect to taxes, the owners in an LLC report profit and loss on their individual tax returns in much the same way as a partnership. On the downside, because an LLC cannot issue stock, it may be more difficult to raise capital.
Limited or General Partnership
A limited partnership is a partnership that consists of two or more partners. In a limited partnership, there is always at least one general partner and one limited partner. Typically, it is the general partner(s) who manages and controls the daily operations of the business. The limited partner is usually just a person who contributes capital. In contrast, a general partnership is a partnership where each partner has the ability to actively manage and control the business. What this means is that each partner can make decisions that bind the partnership and each is personally liable for any debt incurred by the partnership. Liability for limited partners is generally limited to the amount invested in the business while personal liability for general partners is unlimited. Finally, unlike general partnerships, the creation of a limited partnership requires the filing of a partnership agreement.
There is no single best form of ownership for a business. The type of entity that best suits your needs will depend on a number of factors, including the nature and size of your business, your business’ annual revenues, and the potential growth of your company.
Finally, although incorporation can provide many benefits, it may not be the right decision for your business. In some situations, the cost and time associated with making sure you are in compliance with all of the legal formalities may not be worth it. A knowledgeable business attorney can help you decide what is best for your North Carolina corporation.
The Asheville business lawyers at Fisher Stark have the knowledge and experience to assist you in determining which type of corporate entity is most appropriate to accomplish your business objectives. Please give us a call at 828-505-4300 if you would like more information on the difference between the types of entities and the benefits and disadvantages of each.
Last updated 7/5/2015