There is nowhere else to start than your business legal documentation for building business credit.
Legal Structure for Proper Business Legal Documentation
You must separate your business as an entity distinct from the owners of the business. Although the only way to do this is to form a separate legal entity, you do have many choices, including Limited Liability Corporations (LLC), Subchapter S Corporations, C Corporations and Limited Liability Partnerships (LLP).
Limited Liability Company (LLC)
The LLC is one of the most popular types of business entities. It’s ideally suited for smaller organizations and startups, as LLCs are fast and easy to setup. LLCs have a simple business structure and forming an LLC is generally inexpensive. In addition, running an LLC is easier than running a C Corporation or S Corporation fewer rules, regulations and legal compliance issues.
LLCs provide their owners with limited liability protection. This means business assets are owned separately by the LLC, not by the owners. Any liability the business has is a liability of the business, with no impact on the individual owner’s personal assets.
An LLC is a great way to get proper business legal documentation for building business credit.
Small Business Corporation (Subchapter S Corporation or S Corp)
The S Corp is a business entity that was created a to encourage small and family business creation, while eliminating the double taxation that conventional corporations (C Corps) pay. S Corps are formed and regulated on a state level. The liability of the S Corp and the personal liability of the owners and investors are separate. The owners of a corporation are not personally liable for business debts, claims, or other liabilities.
There are more legalities, rules and compliance for an S Corp than an LLC. S Corp’s has a slightly more complex corporate structure and are limited to having 100 shareholders.
Unlike traditional C Corporations, the S Corporation does not need to pay corporate income tax. The S Corporation is a separate tax designation recognized by the IRS. Similar to the LLC, the net profit or loss generated by an S Corporation will flow through to the personal income tax returns of the shareholders and owners, and be subject to tax there.
There may be tax advantages to being taxed as an S Corp, specifically around owners and members taking money out of the business. You can choose to pay yourself a “reasonable” salary and deduct monies above that as share dividend income. That additional income would not be subject to self-employment tax, although it would still be subject to personal income tax.
An S Corp is another great way to get proper business legal documentation for building business credit.
C Corporation
A C Corp, also known as a C Corporation, is a type of business entity that is formed and regulated on a state level. It is created by filing “Articles of Incorporation” with the secretary of state within the state of incorporation. It is the most formal type of company and a corporate structure. The policies and cost of creating a C Corp vary from state to state.
A C Corp has limited liability, so the investors and owners of a C Corp are not generally liable for business debts and other liabilities. It must issue stock and ownership of a C Corp is determined by who owns stock in the company and must hold an Annual General Meeting. The ownership of a C Corp can be fluid and transferred, depending on who holds stock at a particular moment in time.
Stocks in a C Corp can be bought and sold on a public stock market if the C Corp holds an “Initial Public Offering (IPO)” where it makes it stocks available to the public. A C Corp is required to have a board of directors and can raise more finances by issuing stock.
Profits earned by a C Corp may be subject to “double taxation.” Unlike the the Limited Liability Company and the S Corporation, a corporation is required to file a corporate tax return and pay corporation taxes on any profits. When those taxes are paid to shareholders as dividends, they will also be subjected to taxation on that individual’s tax return.
A C Corp is perhaps the most powerful way to get proper business legal documentation for building business credit.
Limited Liability Partnership (LLP)
LLPs are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners. It is a formal structure that requires a written partnership agreement and usually comes with annual reporting requirements depending on your legal jurisdiction.
Most LLPs are created and managed by a group of professionals who have a lot of experience and clients between them. By pooling resources, the partners lower the costs of doing business while increasing the LLP’s capacity for growth. They can share office space and employees, reducing costs to realize more profits. The partners may also have a number of junior partners in the firm who work for them in the hopes of someday making full partner. These junior partners are paid a salary and often have no stake or liability in the partnership.
An LLP is another option to get proper business legal documentation for building business credit.
Don’t Get Rejected by Lenders Due to an Incomplete Corporate Structure!
Office Location for Proper Business Legal Documentation
It is important to have a physical office space for your legal entity. Although it is acceptable to have your business location in your home, most lenders view home-based businesses negatively. You’ll also want to have a website and a professional email address for your business.
Don’t Use Your Home Address or Your Cell Phone Number!
Licenses for Proper Business Legal Documentation
In many jurisdictions, a business license could be required. Check with your local city, county and state authorities to determine the requirements in your industry. These items are critical to business legal documentation for building business credit.
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