Types of Corporations and How to Incorporate Your Startup

Exploring Corporate Structures: A Guide to Startup Incorporation and Understanding Different Types of Corporations for Entrepreneurs and Business Owners.

Launching a startup is an exhilarating journey filled with dreams of innovation and success. However, one crucial aspect often overlooked in the early stages is the choice of the right corporate structure. 

Launching a startup is when you finally bring your ideas to life. But, along with focusing on innovative marketing techniques for startup, you must not forget the legal aspects.  

Your company is a legal entity and needs a business structure. This will separate your assets from business liabilities. Also, a corporate structure lays the startup’s foundation for long-term financial growth.  

The primary types of corporations include sole proprietorships, LLCs, and S Corporations. Incorporating your startup will involve choosing a structure, registering, obtaining permits, and strategizing.   Global business counts were projected to reach 333.34 million in 2021—a little increase above the 328 million recorded in 2019 and 2020.

Managing these tasks can become overwhelming as an entrepreneur. To simplify the process, the post explains the different types of corporations and startup incorporation steps.  

Sole Proprietorship 

Under this business type corporation, the entrepreneur is liable for profits the startup gains. Similarly, they’re liable for the firm's financial losses, debts, or damages. There’s no legal demarcation between the owner and the business. That’s why it’s also called individual entrepreneurship.  

For these corporation types, the owner usually handles business operations via their legal name. Or they can register with their local authorities and conduct business through a trade name. As the proprietor decides all such business aspects, it’s the most convenient corporation choice. 

Moreover, sole proprietors pay taxes individually on the profits or income earned. It’s like an annual tax filing, which can be quarterly, per local tax regulations. The required paperwork is also simple. Owners need to store business records and follow associated legalities.            

Examples of sole proprietorship include –  

1. Freelancers  
2. A grocery store, clothing, or food stall run by a single owner  
3. Online custom software development companies 
4. One-person independent consultancies  

S Corporation 

S Corporation is where the owners pass the taxable income, losses, debts, and profits to shareholders. Small and mid-sized businesses prefer this structure. When it comes to finding the best sources of funding for your S Corporation or any other type of business, it's crucial to explore various options that align with your specific needs and goals.

Firms following this corporation business type don’t handle federal income taxes. Instead, they pass it to the company’s shareholders. These shareholders will report profit or loss as their tax returns. This enables small business owners to save on corporate taxes. 

Known as a pass-through entity, S Corporations offer limited liability to shareholders. So, if the business faces a loss, the personal assets of the shareholders aren’t affected. Their assets won’t be used to cover a company's debt.     

However, shareholders can receive income distributions and salaries. Typically, S Corps owners deduct an amount from company expenses to offer it to shareholders. In addition, the company stock here is conveniently transferable. A shareholder can sell interests without the permission/approval of other shareholders.  

S Corp examples include mid-sized and small firms with less than 100 shareholders.  

C Corporation  

A C Corporation is similar to an S Corp and can share profits among shareholders. This structure also offers limited liability protection to shareholders, so their assets are safe from company losses.  

However, the business profits are independently taxed from the owner’s profits. Being taxable entities, they pay corporate taxes and may face double taxation. It might happen when corporate earnings are distributed as dividends to the owners. The owners can reduce taxes by offering profits as employee benefits. 

So, who are these types of business corporations suitable for? Mid-level or large companies can arrange for a board of directors to be key decision-makers. The owners can also have a shareholder team of their preferred size.  

Adopting the structure may seem complex so owners can seek financial guidance from an advisor. However, the structure is excellent for raising capital and selling the business later.  

LLC (Limited Liability Company)     

An LLC ensures the members are financially secure from company losses or setbacks. The structure protects the owners’ assets in case of lawsuits. However, an LLC has the features of a sole proprietorship and a corporation.  

Companies following this structure, like C Corporations, offer limited liability protection to their shareholders. Moreover, they can provide pass-through taxation advantages to the members. So, these businesses don't pay corporate taxes, only taxes on personal income. 

Perhaps the greatest advantage of an LLC is its tax regime selection. The business owners can select solo proprietorship, S Corporation, or C Corporation regimes per their goals.  

These features make this corporate structure ideal for small and medium-sized businesses. The administrative activities are lower compared to C corporation. Plus, members receive more flexibility in arranging the team as no board of directors is required.   

A Step-by-Step Roadmap for Startup Incorporation 

After understanding the types of corporations, it's time to incorporate your startup. This is a process of obtaining a unique legal identity for the business. It's the first step to secure your company's finances and improve credibility.  

Moreover, investors are interested in incorporated startups, which foster long-term growth. Let’s look at the steps to incorporate a business and fulfil your dreams!  

Step 1: Choose a Corporate Structure    

Selecting a business structure is among the initial forms of incorporation. This corporation business type must align with your taxation and business operations.  

For example, a solo proprietorship will be a good option if you have an independent business with no team. However, you won't receive liability protection, so financial planning is vital.  

But, if you have a small or mid-level business with liability protection requirements, an LLC or a C Corporation can be suitable. While exploring the different kinds of corporations, consider your team size, financial objectives, and legal support.  

Also, consider the number of owners and shareholders during the incorporation of company.  

Step 2: Select a Startup Name  

After deciding the business type corporation, you must select a unique name for your startup. It must clearly define the service or product. For instance, a mobile application for booking cabs can have "Go" as its name.  

However, you must ensure another business has not already taken the name. Then, follow these tips to get started –  

• Conduct a company name or trademark research online  
• Identify brands with a similar name and see their offerings  
• Look at what your competitors are selling  
• Check if your preferred name has an available domain name  
• Ensure the name is unique and relatable  
• See if you can represent the name through logos, ads, and marketing collateral easily  
• Avoid complex jargon in the name  

Step 3: Choose a Business Location  

Location is a crucial aspect in incorporating a company, as this is where you’ll conduct your business.   
This can be your home state, city, foreign country, or another state. Wherever you set up your business, understand the establishment and taxation rules. Changing the location can increase the overall financial and brand promotional expenses.   

When you finally select the location, ensure your target audience resides there. Also, research the local markets and understand customer requirements. This will help decide a domain name and create a website that users can resonate with.  

For better brand reach, you might consider establishing the business abroad. However, that depends on your financial strength, team size, and service standards.  

Step 4: Getting an EIN (Employer Identification Number)    

This step comes after completing the startup registration process. An EIN is like a social security number uniquely identifying your business. The respective local authority will provide you with this number. It's essential for managing your taxes, applying for business licenses, and opening an official bank account.   

To obtain the number, visit the relevant website and submit an application. You can apply through phone or email. Make sure you enter details like business structure, ownership, and types of services carefully.  

Usually, applicants receive the number immediately after the required form submissions. If you have selected a registered agent earlier, they can complete this process for you.    

Step 5: Gather the Necessary Permits 

Incorporation of company requires multiple business permits, which help you avoid legal issues later. These include environmental permits, workplace safety licenses, food safety, and your startup registration license.  

It's essential to contact the local authorities or your registered agent to apply for these permits. However, these permits will depend on the selected corporation types of business.      

Final Thoughts  

Deciding on a business-type corporation lets you manage multiple aspects. You can build your team, hire additional members, or modify strategies to suit the structure. Most importantly, developing a financial roadmap becomes simpler when you're clear about the taxation and liabilities.  

So, conduct extensive research and weigh the options before selecting corporation types like LLC or sole proprietorship. Look at your competitors and discuss with your team to find the perfect option.  

Don't forget to register for the state taxes after the incorporation. The regulations can vary according to the state, so understand them carefully.