Most Big50 we talked with understand how their companies are organized, although few could specify all the pros and cons of every alternative. For those details, they all bow to the advice of their accountants and attorneys.
Here, we provide a few examples of how Big50 members have set up their companies, with a plain English explanation of what each might mean to you and your business.
Sole Proprietorship None of the Big50 questioned responded as subscribing to this type of organization. The sole proprietorship is an easy way to start a business, because it says, “I am a company and I am open for business.” There is no distinction, however, between the owner and the company or between personal and business assets. This can be helpful when trying to get your business started, but it does not provide you with personal protection. Any lawsuit, creditor, or the like can reach right into your personal bank account.
Kalman Construction Corp.
$10 million volume
A “C” corporation works best when dealing with a business that has numerous owners. The corporation is a separate entity, and no owner is held personally responsible for corporate activity. There is no limit to the number or type of shareholders (owners), so the company has room to grow indefinitely. The government sets certain rules for “C” corporations that the corporations must follow. These include holding an annual meeting of shareholders and directors and keeping minutes at each meeting. Failure to follow these rules can result in personal liability for the owners. Corporate profits can be paid out as dividends to owners, but this creates a “double-taxation” because the corporation pays taxes on its income, and the shareholders must pay income tax on dividends they receive. This type of double taxation is often not noticeable in a large company but may be difficult when the company owners and shareholders number just a few. Unless the company is a large corporation with aspirations to grow beyond 75 shareholders, there are few benefits to being a “C” corporation. In fact, the outcry over the double-taxation policy, and its unfair affect on small, usually family-owned, businesses, led the government to create the Subchapter “S” corporation.
Sub “S” Corporation
Sharon E. Rainey
Home Equity Builders
2 owners, $1.4 million volume
A company must first become a “C” corporation and then apply for “S” status. In this case, the taxes are paid not by the business but personally by the owners, eliminating the double-taxation. The number and type of owners is more limited, and the “S” corporation is subject to the same rules concerning meetings and minutes as the “C.” However, in an “S” corporation, any gain or loss the company incurs will be documented on the personal income tax return of the owners. Smaller, singularly held companies are often “S” corporations because the owners can keep a close eye on the movement of the company and who is investing. The benefits are plentiful: The shareholders actually net more money from their company's profits and are protected from its losses.
Limited Liability Company
H. Douglas Porter
Woodstock Building Associates
24 employees, $6 million volume
The Limited Liability Company (LLC) is becoming one of the more popular options for small businesses everywhere. A relatively new development, it has almost no downside for a small business. The LLC is quickly becoming the choice over Limited Liability Partnership, the Limited Partnership, and the Partnership. It provides the pass-through profit or loss quality of the “S” corporation and the protection of a “C” corporation. The LLC shareholders are called members and none are held personally responsible for company issues. (Generally, there must be at least two members.) The fact that these corporations are so new means there is less predictability and less history to look to in case of a problem. Many times, the LLC has to have a dissolution date and cannot have a perpetual existence. Careful drafting by a skilled attorney can help to avoid these issues and provide for the continuation of the company in the case of death or withdrawal of one or more members.