When you start a new business in Georgia, choosing which business form to establish represents one of the most important decisions you will make. Why? Because your choice of business entity will affect your company’s ownership, business practices and tax consequences for years to come.
Per the IRS, the following types of companies comprise your main entity choices:
- Sole proprietorship
- S Corporation
- Limited Liability Company
If you plan to go it alone, especially at first, consider forming a sole proprietorship, the default business entity. You may wish to apply to the IRS for an Employer Identification Number. You will pay your company’s income taxes via Schedule C of your personal income tax return.
If your business comes about as the result of joint efforts of you and someone else, or several others, forming a partnership may be your best option. You need a written partnership agreement that sets forth each partner’s ownership interest, responsibilities, etc. The partnership files only an annual informational income tax return. You and your partner(s) pay the company’s income taxes via your respective Schedule Cs in proportion to your respective ownership shares.
If you feel that personal asset protection is important in case someone sues your business or you experience a business failure, your business entity needs to be a corporation. Corporations, aka C Corporations, are stand-alone legal entities, separate from their shareholders. You will need to file Articles of Incorporation and Bylaws with the Georgia Secretary of State’s Office and hold annual shareholder meetings. The main downside of a corporation is that it pays its own income taxes, resulting in double taxation because each shareholder also pays his or her own share of its taxes.
Electing S Corporation status solves the double taxation problem because this type of corporation represents a corporation-partnership hybrid. Still a separate legal entity providing personal asset protection, S Corporations, however, do not pay their own income taxes. You and the other shareholders pay your respective shares of the company’s taxes.
Limited Liability Company
An LLC is a corporation if you and its other owners choose to treat yourselves as an S or C corporation for tax purposes. One major advantage of an LLC is the inclusion of other corporations, other LLCs and foreign entities as shareholders.