One of the biggest decisions that you can make is what your corporate structure will be. Basically, there’s three fundamental types:

1. C Corporation.

2. Subchapter S Corporation.

3. Partnership.

There’s a fourth choice and that would be if you decide not to form a company at all and just operate as a sole proprietorship. You might also ask what about another form that you’ve heard about the LLC, Limited Liability Company? The answer to the later is that it all depends. It could take on one of the three characteristics above. It depends upon your particular election. But note that the tax code does not mention an LLC. In other words, an LLC is not a separate type according to the tax code. It becomes what form you choose it to be.

With a lot of things, it will depend upon what is your particular end in mind. What is your exit strategy for your company whether it be a few years from now or, perhaps, decades from now or, perhaps, generations from now? One key factor can be is that a C Corporation can get taxed twice, once on the income to the corporation and secondly on the income past through to you as a shareholder. That double taxation can be extremely punitive creating an effective tax rate of nearly 70% or about 50% if you’re dealing with capital gains on the income passed through to you. On the other hand, the S Corporation and the partnership pass through the income to the shareholders or partners. Thus, there’s just a single level of taxation.

However, that does mean that there can be tax impacts on the personal side that you wouldn’t have on the corporate end. Income earned is passed through to you as an individual in a sub S or partnership, so you’ll need to have money distributed to you to cover that tax effect. Another factor can be the deductibility of certain expenses and different corporate structures will have different deductibility. For example, there may be certain expenses that you can deduct as a C Corporation that would not be deductible as a subchapter S or partnership that would instead get passed through to you.

Another factor can be the party that wants to be acquiring you. In some cases the investors or acquirers are going to prefer to acquire a C Corporation.

There are many other factors. The point is this is a pretty specialized area, so get in a financial advisor to help you out on this one. And make sure you consider all the angles and you take the long-term view. The decision you make in the short-term could have a long-term impact that is different form what you want.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value