Avoid costly meetings and surprise liabilities by making staying informed on basic corporate terminology and paperwork.
Foundational documents that create your LLC or corporation. The name varies by state but serves the same purpose.
A trade name allowing your business to operate under a name different from its legal name. A DBA offers no liability protection—think of it as a branding tool.
A document outlining roles, responsibilities, and decision-making processes for business members. While not always legally required, it’s critical for clarity and dispute resolution, especially for opening a business bank account.
Issued by the IRS, this number identifies your business for tax purposes. Required for LLCs and corporations.
A formal document authorizing your business to establish a banking relationship. Essential for corporations and, occasionally, multi-member LLCs. Identifies who can open accounts, manage funds, and make financial decisions.
Outlines ownership percentages for corporations issuing shares. Crucial for startups and traditional businesses operating as a corporation, especially when attracting investors or documenting initial contributions.
An LLC (Limited Liability Company) is the simplest legal structure for a business. It separates your personal assets from the business, providing "limited liability" protection, and gives you a straightforward framework to hold assets, manage bank accounts, and conduct business. Setting up an LLC usually involves three steps:
An LLC is flexible in how it can be taxed. By default, it’s taxed as a sole proprietorship (if single-member) or a partnership (if multi-member), where profits pass through to the members' personal tax returns, divided by the number of members in the LLC. However, you can elect for your LLC to be taxed as a C-Corp or S-Corp, depending on your business goals.
This means the business pays corporate taxes on its earnings, instead of those earnings being taxed as personal income for members. A C-Corp tax structure can work well if you don’t plan to take much money out of the business for yourself. In this case, profits left in the business are only taxed at the corporate level, avoiding additional personal taxes. However, if you take distributions in the form of dividends, those payments are taxed again on your personal tax return—resulting in "double taxation." Tax benefits vary by state—for example, in some states, C-Corp rates are lower than personal income rates, while in others, they may be higher.
With this election, the profits still pass through to the members’ personal taxes, avoiding double taxation. However, you may need to pay yourself a "reasonable salary," which is subject to payroll taxes. S-Corp election is often used to reduce self-employment tax for small businesses. This works best for internet- or innovation-based businesses with limited need for investment, or small businesses whose income and ownership may be split up among a family or similar group.
LLCs are perfect for most small businesses due to their simplicity and flexibility. If you’re running a small operation, default LLC taxation is likely enough. A C-Corp tax election can be useful for specific financial strategies, while fully operating as a corporation is typically reserved for businesses planning to grow significantly or attract investors. Choose what fits your needs!
C-Corporation: The default corporation type. Profits are taxed at the corporate level, and dividends are taxed at the individual level (double taxation). Suitable for large businesses or startups planning to issue shares.
S-Corporation: Avoids double taxation by passing profits directly to shareholders’ personal tax returns. However, S-Corps have restrictions on the number and type of shareholders.
Startup Note: For high-growth companies, filing an 83(b) election can reduce future tax liabilities.
Incorporating your business doesn’t need to be complicated or expensive. While legal advice can be valuable, straightforward setups often don’t require significant spending. Educate yourself to build a strong foundation for success. If you have questions, feel free to contact me at ben@palaskasconsulting.com or call 805-886-9173