Should I Incorporate? C, LLC, S or Me!

I was speaking at a prison recently and fielded this question from the audience. 

Should I incorporate my new business? if so, which type of corporation should I use?

I commend you if you are thinking about starting a business. I’m convinced that’s the best way to go if you are willing to put in the effort. Since so many employers don’t hire folks with a criminal history, so why not hire yourself? 

Do you need to be incorporated to start a business? Absolutely not. There are millions of businesses that are successful and aren’t even incorporated. These are called “sole proprietorships” as they are usually owned and operated by a single person or married couple. 

Most people recommend you incorporate a business to protect you personally from liability or lawsuits. Personally, if money is tight (when isn’t it, right?) I feel it’s far more important to buy insurance for your business than it is to incorporate. Commercial clients and savvy consumers will check to see if you’re insured, but they don’t care if you are incorporated or not. You can incorporate any time, like after the business has some cash flow and it’s not as much of a sacrifice. 

There’s more to a corporation than just liability protection. The law considers corporations a separate legal entity, like a person, but without the right to vote. There are three main types of corporations. They are Limited Liability Corporations (LLCs), “S” Corporations, and “C” Corporations. 

LLCs and corporations are similar but different. You can own shares in both. Both are considered separate legal entities. LLCs have “members” and a “managing member” and control is governed by the Operating Agreement, and whomever the managing member is, regardless of the percentage of the LLC owned (usually). Corporations have stockholders and officers, typically with control based on the percentage of shares owned.

Income from LLCs and S Corporations are based on the individual owners’ tax rates and there is no separate corporate income tax collected for LLCs and S Corporations. C Corporations are usually larger entities, and if you use a C Corporation, plan on playing income taxes on what the corporation makes, and income taxes on what you as a shareholder receive from the company.  

A good attorney or CPA can better advise you which option is best for you. For most small businesses, an LLC or an S Corporation will suit your business needs well. 

Ask Bob answers questions about life, successful re-entry, starting a business and entrepreneurship, and most anything that adds value, except the column does not cover legal issues, sentencing matters, or case issues.

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