If you're just starting out in business, you may hear the word corporation and think of a huge, multi-department, publicly traded company, but, in fact, even the smallest home businesses can benefit, in many situations, from incorporating. There are several different types of corporations, each with it's own benefits and drawbacks, as well as legal requirements, so it can be a little intimidating to decide how to incorporate your business, particularly if this is your first time starting a company. It's a good idea to consult a lawyer or business mentor before beginning the incorporation process, but here's a quick primer that should give you enough info to get started.
General Corporation
This is typically what people imagine when they think of a corporation, and it's the most common type. General corporations can have an unlimited number of shareholders whose personal assets are protected from the debts and liabilities of the business. Other advantages of a general corporation include various tax deductions for all kinds of business-related expenses, the corporation continues to live on even after the death of the owners, and raising funds is made relatively easy through the sale of stock. The disadvantages include a hefty amount of federal and state regulations and a higher cost associated with incorporating than many of the other options.
Close Corporation
A close corporation (or C-Corp), as the name implies, is much more closed than a general corporation. Most of the rules are the same, however there is generally a maximum number of shareholders in the 30-50 person range and stock must first be offered to existing shareholders before being sold to new ones.
S Corporation
An S-Corp is actually just a different tax strategy for existing corporations to be able to take, and if you are starting a home business, this is one to pay particular attention to. In a traditional corporation, profits would be taxed at the federal level, then dividends would be paid out to the company's shareholders, who would then report their earnings as income and pay taxes on that income. You can see how if you were a sole proprietor, you would be subject to paying tax twice on your profits under the general corporation rules. The S-Corp was created to avoid this double taxation by allowing all gains/losses to be reported once on the personal tax returns of the shareholders. You can see how this would be difficult for a large corporation with many shareholders, but works perfectly for a sole proprietorship, or a very small group of owners/shareholders.
Limited Liability Company
The LLC is perhaps the best choice for a home business, however, because it takes many of the advantages from all of the above. Like an S-Corp, LLC's are authorized for pass-through taxation, however an S-Corp has a long list of IRS restrictions that LLC's do not. LLC's still provide protection of personal assets from business debt and plenty of flexibility at the management level. Some potential disadvantages are LLC's do not have stock, which may make fund raising more difficult, they cannot exceed 30 years and many states require 2 or more members to form the LLC.
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