Not all corporations are created equal. When many people hear the term “corporation,” they often think of a huge business with hundreds or thousands of shareholders and thousands or even millions of dollars in profits. While this is true of some corporations, most corporations in the United States do not fit this description. In fact, they may have just a few shareholders or even just one.
While many corporations do have stocks that are exchanged on large, national stock exchanges, not every corporation is “public.” Instead, many corporations are considered “private,” which simply means they do not trade their stock to the general public. These companies often have a few shareholders, many of which may have close personal relationships with one another. Family-owned small corporations often fit this description.
You may think that you need a large business to incorporate and receive the many benefits associated with this business structure. However, creating a private corporation is often more straightforward than you might think, and the benefits can be significant.
What is a Private Company?
Technically, the definition of a private company is more than just a corporation. However, private corporations come in three forms: limited liability corporations, S corporations, or C corporations. Each of these varieties offers many benefits for shareholders, including asset protection and tax reduction.
An S corporation can have no more than 100 shareholders while a C Corporation can have an unlimited number. Both types of corporations do not have to submit quarterly or annual financial reports or meet other requirements imposed by the Securities Exchange Commission (SEC).
You can avoid a great deal of paperwork and legal requirements by creating a private company rather than a public company. There is no public reporting requirement that must be met for most privately held companies. However, private companies are less liquid than public companies, and finding investors can be difficult.
Asset Protection Benefits of a Private Company
Corporations are a well-known asset protection tool. Yet, many individuals shy away from this tool because they assume that it will be too much work or will not provide comparable benefits. Corporations are often one of the most effective asset protection tools, however.
A corporation is a separate legal entity. They can take out loans, file taxes, and pay salaries. The ownership of the corporation is vested in its shareholders, which is evidenced by issuing shares of stock. It also has a Board of Directors that is charged with managing the company on a day-to-day basis. However, just because you have these formalities does not mean you need many different people; you can often assign just one or two people several roles, which opens up this type of structure to even very small companies.
Regardless of whether you create a C Corporation, an S corporation, or an LLC, you will gain asset protection simply by establishing the business. Setting up this asset protection tool allows you to protect your personal assets and maintain separation between the business and your personal life. Corporate principals have no personal liability for debts incurred by the corporation, including situations that involve personal injuries, employee claims, or breaches of contract. In most situations, a creditor that has an issue with the corporation can only collect from assets the corporation owns.
However, keep in mind that Corporations themselves (C or S) do not have charging order protections similar to LLCs or Limited Partnership.
Private Corporations and Tax Reduction Strategies
Because a C corporation is a separate legal entity, it is taxed separately and at a different rate than your personal tax obligations. That means that the corporation is taxed on its income, and you are taxed separately on any income that you receive from the corporation. This “double taxation” can be a deterrence to setting up a corporation for some.
However, you can actually take steps to reduce your tax liabilities by creating a private corporation. For example, you can deduct business expenses from the corporate tax return in a way that is not permitted on an individual tax return. This benefit decreases the overall tax rate for the corporation because there are fewer dollars to tax. Corporations also have tax deductions and credits that are simply not available to the individual taxpayer.
An S corporation is a slightly different animal. Instead of being taxed separately, you choose to be taxed as a “pass-through entity” such as a partnership or sole proprietorship. That means that there are no issues with “double taxation,” but you still get all of the benefits of incorporating. For many small business owners, this corporate structure makes the most sense from both an asset protection and tax reduction standpoint.
An LLC also offers flexible federal tax treatment; it can be taxed as either a sole proprietor or a corporation. The members of the LLC choose which option works best for them.
Understanding All of the Benefits of a Private Corporation
The right corporate structure for you will depend on your tax needs, the size of your company, and the type of product or service you provide. It can be a difficult decision, but it is often one that you must make to avoid overpaying for your tax obligations. It also provides significant asset protection benefits as well.
Studying your options in-depth is the best way to ensure that you are choosing the right structure for your situation. Protect Wealth Academy offers an extensive library of information to guide you in this decision-making process. Sign up for a free membership.