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Choose a Business Entity > The Corporation - Pg. 18

First Steps · Limited liability company ("LLC") · Partnership · Sole proprietorship 18 This section introduces the major distinctions and varieties of the corporation, LLC, and partnership, as well as finding the entity most suitable to your enterprise's needs. Fortunately, you can always reorganize--often tax-free--as a different entity if those needs change. Note NOTE Because sole proprietorships are generally inappropriate for a development company, they willnot be covered here. Figuring out the best kind of entity for your business will help your company: 1. 2. Protect owner and employee personal assets from company liabilities. Minimize taxes by using losses to offset gains, avoid corporate-level tax (i.e. "double taxation"), and pass the money into your pocket at long term capital gains ("LTCG") rates, which top out at 20 percent, instead of ordinary income ("OI") tax rates, which can climb to 38.6 percent. Gain access to the financing sources you need by organizing in a financier-friendly form. Create a clearly defined ownership pool that can be divided among founders, financiers, and employees. Operate efficiently with third parties, such as suppliers, customers, and employees. 3. 4. 5. The biggest differences among the entities are the following: Corporations are treated as separate legal entities, almost like a person, that are owned by other separate legal entities (shareholders). The major benefit of this is that anyone suing or collecting from a corporation can only collect from the corporation's assets (except in very limited circumstan- ces, see "The Corporation: C-Corporations: Liability" section)--so your company's creditors couldn't take your house if the company ends up unable to pay its bills. The major detriment of the separate entity theory is that every dollar you earn as a corporation will be taxed twice: the corporation pays tax on its income, and shareholders pay tax on money distributed to them as dividends or stock value appreciation. S-corporations, which avoid the double tax, are discussed in "The Corporation: S-Corporations" section. Partnerships, LLCs, and S-corporations have the bonus of "pass-through" taxation, meaning that all income is passed tax-free through the entity to the owners, who then pay tax on the distributions. These entities have other drawbacks--greater exposure to company liabilities and onerous own- ership restrictions, respectively--that are discussed in depth later in this chapter. Note CAUTION DOUBLE CAUTION: State law generallygoverns business organization and op- eration.These can vary significantly, so Ican't urge you strongly enough to consulta local attorney. Understanding thevagaries of state law (and you may haveto comply with the laws of more thanone state) isn't easy, so don't go it alone. The Corporation There are two types of corporations, the C-corporation and the S-corporation , so named for the Internal Revenue Code subchapters governing each. The two share many of the same structures: the company is owned in units of equity called shares; shareholders control the company indirectly via an elected board of directors, who hire and fire the executives that run the company. The main