Starting a business in Nashville? One of the things you need to discuss with your CPA is how to structure your company. You have several options, as you may find here, and your choice can factor greatly into how you do business on a day-to-day basis.
In many cases, it’s highly advisable to register your business as a separate entity that will protect your personal assets from your business’s debts and actions. An LLC or limited liability company is often considered as the best choice for small and medium-sized businesses. However, it might also be worth looking into forming a corporation, especially if you’re hoping to grow your business and attract more investors in the future.
What is a corporation?
A corporation has a separate legal identity from its owners or incorporators. As such, it gives the owners protection by way of limited liability, that is, their personal assets are shielded from the corporation’s debts and obligations. If your corporation runs into financial problems, for example, your creditors may not go after your own car or home to get payment for your company’s debts. In contrast, a sole proprietorship or partnership does not provide the same protection.
Typically, corporations are created for larger companies with several investors, but a single shareholder may also form a corporation.
A corporation is taxed as a separate entity, and in Tennessee, individual owners and shareholders are also taxed for the income they make from the corporation through dividends.
Advantages of a corporation
A corporation is a good choice for businesses that are considered “risky”, such as roofing repair or stock trading, as it protects the owners from any liability the company might incur. In addition, it also enjoys other advantages, including the following:
- It’s easier to raise venture or additional capital in a corporation. In fact, many venture capitalists or investors often require that a business be incorporated before putting money in it. If the business requires more funding in the future, new investors can easily infuse money by purchasing shares of the company’s stocks. They don’t need to be added to a partnership agreement. The company also has the option to go public if it achieves the right size.
- Corporations enjoy a low federal tax rate of 21%. In Tennessee, corporations are taxed by the state at a rate of 6.5%. As the state does not impose income taxes, shareholders are taxed only for the dividends they receive from the corporation, if any is declared. Any income you make through a salary or an increase in the company’s stock value will not be taxed. In many cases, the combined taxes paid by a corporation and its owners are lower than those paid by owners of pass through entities like partnerships or LLCs.
- Corporations offer other tax benefits to you as an owner and employee of the company. For example, if you’re also the CEO of the corporation you formed, you receive an income tax-free salary, which is also a tax-deductible expense for the company. In addition to salaries, other benefits that the corporation provides its employees, such as medical insurance premiums, are also tax-deductible.
A corporation is not for everyone, but to the right business, it can provide plenty of opportunities for savings and growth. Discuss your options with your CPA and decide which business structure is right for your venture.
What Kind of Tax Will You Owe on Tennessee Business Income?, NOLO.com
Corporations and S Corporations vs LLCs, NOLO.com