Are you ready to incorporate your small business? The decision to formally register your business as a corporation opens up a wide range of benefits, including legal protection, tax deductions, and additional investment capital. However, determining which legal structure is best for you will ultimately come down to the specific goals and needs of your small business. In this episode, Jon Aidukonis and Gene Marks, along with Travis Crabtree, the President and Co-Founder of Swyft Filings, discuss the different types of business entities.
Podcast Key Highlights
- Reasons to Incorporate Your Small Business
- The decision to incorporate your small business ensures that your personal assets will be legally protected in the event of an accident.
- Incorporating your business also allows you to take on investors and shareholders.
- Corporations are eligible for a number of tax breaks.
- Depending on which state you register in, you may have more control over how much information you’re required to release to your shareholders.
- Reasons to Incorporate Out of State
- Incorporating out of state enables you to expand your pool of potential business investors.
- Because some states require more disclosure about your business both in person and online, a lot of business owners may decide to incorporate in a state that doesn’t impose such a high level of transparency as a way to protect their privacy.
- The Three Types of Licensed Corporations
- LLC (Limited Liability Company)
- S Corp (S Corporation)
- C Corp (C Corporation)
- The Pros and Cons of LLCs
- LLCs require the least amount of administrative paperwork.
- LLCs are not required to have annual shareholder meetings.
- For tax purposes, an LLC is treated as a pass through entity.
- There are restrictions on who can be shareholders in an LLC.
- The Pros and Cons of C Corps
- C corps don’t have limits on the number of or types of shareholders, which makes it easier to sell stock within the company.
- It’s also easier to do different types of stock within a C corp.
- Unfortunately, C corps are not regarded as pass through entities so they will be subject to higher taxes.
- The Pros and Cons of S Corps
- Like LLCs, S corps are also recognized as pass through entities by the IRS, making them eligible for similar tax deductions.
- All shareholders within an S corp have to be U.S. citizens. They cannot be trusts or subsidiary companies.
- The Pros and Cons of Using a DBA (Doing Business As)
- If the Secretary of State rejects your company’s name availability, you can still use it in another state to enter contracts and operate in public, even if it’s not your business’s official name.
- Your DBA can help solidify your company’s brand and prevent other people at the different county levels from using the same name as yours.
- Because some courts cannot enforce a contract that was signed under a DBA, you may not always get the personal asset protection that you’re entitled to as a licensed business.
The views and opinions expressed on this podcast are for informational purposes only, and solely those of the podcast participants, contributors, and guests, and do not constitute an endorsement by or necessarily represent the views of The Hartford or its affiliates.
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Jon: Hello everybody, and welcome to Small Biz Ahead. The small business podcast presented by The Hartford. This is Jon Aidukonis and I’m joined with my trusty co-host Gene Marks. Gene, how are you doing?
Gene: I am doing fine today, Jon. How are you?
Jon: Good, thanks. Nice to see you again. We are doing this via Teams for those in the audio sphere so we can actually see…
Gene: Someday we’ll get back together. We’ll get back together face to face, won’t we?
Jon: One day.
Gene: One day, we hope.
Jon: And we are joined by a special guest today, Travis from Swyft Filings. Travis, how you doing?
Travis: I’m doing well, Jon, thanks for having me.
Jon: Thanks for joining us. And we are here today to talk about everyone’s most exciting topic, how to form a corporation and what that really means. Or I guess I shouldn’t even say corporation. How to file for the right kind of business license for the entity that you are looking to operate.
Travis: Yeah. That’s right, Jon, and you’ve kind of hit on a sore point with our internal marketing team, because what I like to say sometimes is we take care of all the non-sexy stuff. Right? So the paperwork and compliance so that entrepreneurs can follow their passions, right? But let us handle the boring paperwork. So sometimes the marketing team gets mad at me when I say it’s all about the non-sexy stuff, but it’s important. Although it’s not the top of mind on entrepreneurs when they started the business, it is important to get it done and to get it done right.
Jon: I think Gene and I can relate, being on the insurance and the CRM side, we will take care of the stuff you don’t want to, so you can focus on the stuff that actually made you think I should be in business in the first place.
Gene: I agree, and Travis, if you can see, I’m… If you haven’t figured out by looking at me on this conversation, I am a CPA, right? So it should be no surprise. So yeah, we’re all boring and unexcited. But let’s make this exciting for our audience, right? Because it’s a really important topic.
Jon: That is true.
Travis: Yeah. Yeah.
Jon: So, Travis, maybe you can talk to us a little bit. So kind of like in that bucket of like the unsexy stuff, what does Swyft Filings actually do?
Travis: Sure. So we do online incorporate services for an LLC, a corporation or a nonprofit, S corp, C corp, we’ll talk about all of those things over the next few minutes. But we make it really simple so that you go through our system, answer a few questions. If I’ve done my job right, you’re a CPA, Gene, I’m a lawyer, but I’ve tried to make it super easy and super understandable to everybody by asking the right questions so that we can get the information, get your paperwork done and then just do the ongoing compliance. Annual reports, registered agent, things like that, that are just kind of checking the box and necessary things to not only help you start your business, but also keep it in compliance and then grow it from there.
Jon: Nice. I guess, so if I’m someone thinking about starting a business or starting a new business or I guess even formally kind of filing for that right, what are some of the things that I might want to think about before kind of contacting you? Or is it really call us and we’re going to work through that process with you?
Travis: Yeah. So the website has lots of informational articles. Usually first, should I incorporate it? And if so, why? You know, why go through this headache and why go through this administrative burden? Now, I’m sure accountants have a different answer, but from the lawyer’s perspective, our number one concern as a lawyer is that you protect your assets so that if something bad were to happen… When I say that, it doesn’t mean that it’s your fault, necessarily, but you’re delivering cupcakes and your cupcake delivery driver crashes into somebody on just an accident. Nobody is intentionally doing anything wrong. You’re not going to lose your personal assets. If there’s a lawsuit or a creditor comes after you, they can go after the assets of the company, but you can protect your personal assets by having formed a corporation as opposed to just operating as what’s called a sole proprietor. That’s somebody doing business that has not going through the formal incorporation process.
Jon: Gotcha. I guess thinking about that a little bit, when we think about kind of the legality of filing and when we think about what kind of business we might be, what I always have kind of been fascinated by is where your business is established versus where you might operate. Is that something you kind of help people think through? And is there a world where they might think about having a business based in Nevada, but maybe having operations or staff based in Washington?
Travis: You bet, and there’s… Let me go back a step back for a second. For 95 to 99% of businesses out there, usually you want to incorporate where you’re located. So if you’re in Texas, you can file with the Texas Secretary of State. Otherwise, if I’m in Texas, Swyft Filings, that’s our headquarters is in Texas and we form a Delaware LLC, now I’ve got two administrative things I’ve got to keep up with. I’ve got to do a state tax return in Delaware. So it does add some complexity, so then the question is, well, why do people do that then? A lot of people choose to file there because investors are very familiar with Delaware C corps.
Travis: If you’re seeking investment, if it is, I’ve got to raise money from venture capitalists or somewhere else or I’m done, then yeah, maybe a Delaware C corp makes sense, because those types of investors are very familiar with Delaware C corps and are very happy to engage in those whereas they may not be used to investing in a Rhode Island LLC. It does not mean you can’t get that investment if your business is right, it just gives a little comfort level.
Travis: The other reason people sometimes incorporate out of state has to deal with disclosures and privacy. There are certain states that require you to disclose more about your business and they make it available online. Again, in Texas, you have to put a principle business address and it’s freely searchable online and so there are other states that don’t necessarily require that. It also has to do with disclosure of the owners of the company. Wyoming, Nevada and Delaware are kind of three states that don’t have as much disclosures as many of the other states and therefore are also popular for that reason.
Jon: Gotcha. Now, I’m assuming that also is kind of impacted by the type of business that you are, right? To your point. So could you give us a rundown on the different types of formations there could be and what those entities kind of mean for our folks that are listening?
Travis: Sure. So it really breaks down into three. I’ll focus on the for-profit sector rather than nonprofits, but when you’re talking about for-profit businesses, the most common is the limited liability company. The LLC. The LLC is the most common and popular, because it’s the easiest to manage and it’s the easiest to stay in compliance with. The next one after that is referred to as S corp, which is technically like a… Not to get too far into the weeds, but is somewhat of a misnomer, because you’re still a corporation at the state level. An S corp designation is an IRS designation that you make. Sometimes the states offer S corp designations as well, but an S corp is an IRS designation you make that relates to taxes. Each one of those has their pluses and minuses and happy to go through those pluses and minuses one at a time, if you’d like to.
Jon: Yeah. I think that’d be great.
Travis: So let’s start with the LLC. Again, it requires the least amount of administrative paperwork. There’s not required to be annual shareholder meetings with a bunch of notices going out. That is the most common that is used by small businesses. In addition to the simplicity aspect, it is what… It’s treated for tax purposes as a pass through entity. What that means is if the company has profits at the end of the day of $1 million, let’s say, as a pass through entity, that $1 million just gets passed through to the owners. So if you had one owner, all of that $1 million of profits gets passed down to that owner and then that owner is taxed at their regular federal income tax rate. So at that amount, that’s on the higher end of the scale, so it’d be roughly 7% on a good chunk of that money.
Travis: When you don’t have that pass through treatment, which is what would happen for a C corp, what’s going to happen is on that $1 million of profit, the corporation is going to have to pay taxes on that first. That’s roughly 20, 22%, around there. But for the ease of the math here, let’s just say it’s 20%. So the company would pay the federal government 20% of that $1 million. So $200,000 is out the door. Now there’s only $800,000 to pass down to the owner. That owner is, again, paying $800,000 taxes on that. So that’s what’s called the double taxation issue. You’re paying more in taxes, because the corporation pays a tax first, then it’s getting passed down to the owners after that tax is paid and the individual owners are still paying taxes on it.
Travis: So the LLCs are very popular when it comes to the simplicity and the pass through treatment for tax purposes. Now, there are some limits to the LLC and some cons related to that. We talked about if you are the next tech unicorn, Silicon Valley, you need $10 million or you’re not going to be in existence, there are limits on who can be shareholders in LLCs. Again, the conventional wisdom is that if you’re seeking venture capital money or private equity money, they’re more comfortable investing in a Delaware C corp, even though there is that taxation. But if that’s not you, then the conventional wisdom is that you would stick with that LLC, because otherwise you’re putting up with the extra headaches and you’re paying more on the taxes.
Travis: On the C corp side, again, conventional wisdom and everybody’s situation is a little bit different, is that you would form a C corp if you were seeking that venture capital money and trying to do it. Most of the publicly traded companies that we’re all familiar with are all C corps. It doesn’t have limits on the number of shareholders. It doesn’t have limits on the types of shareholders. So it’s easier to sell stock in a C corp. If you’re going to have hundreds of investors, then you might want to be a C corp. It’s easier to do different types of stock. So if you’re familiar with the Facebook story, for example, there’s different classes of stock that hold more voting power, so that’s how Mark Zuckerberg stays in control, because he has all of the voting power. You can do all of that a little bit easier through a C corp. If that’s the route that you’re going, you might want to file that.
Travis: Now, the last one is an S corp. Again, it’s a little bit of a misnomer, because at the state level, you’re filing for a corporation, but then you make a designation with the IRS to be treated as an S corp. What that means is you will deem the benefit of the pass through taxation that we talked about. By filing that, the IRS treats you as a pass through entity. They treat you the same as they would an LLC. So you get the benefit of avoiding that double taxation. So it’s a very common tactic for corporations to file an S corp designation.
Travis: The shareholders have to be U.S. citizens and they can’t be trusts or other subsidiary companies. That dual class of stock issue that I talked about. You can’t do that if you’re filing an S corp. So there are limits to it even though there’s a tremendous amount of tax benefits.
Travis: I’ll tell you this, Jon, the Swyft Filings, the company that I’m working for now, we don’t provide legal advice. We’re an online filing system to help you make it easy. When you call our team, you don’t talk to lawyers. So even though I’m saying that, as a recovering practicing lawyer, all I really cared about when my clients would come to my law office would be that they file and they get that asset protection. What I would say when they started asking which type of entity makes the most sense for me, it’s usually, quite frankly, go talk to your accountant. Go hug an accountant. Take an accountant out to lunch. Pick their brain a little bit, because it’s really an accounting and tax issue more than it is a legal issue.
Travis: At Swyft Filings, we have tons of information to determine what’s right for you. Regardless of which one you pick, we can help you get it filed and stay in compliance, but a lot of times it’s more of a tax issue than it is a legal issue.
Jon: Awesome. I think that’s a lot of good insight, because I don’t think a lot of people know what they don’t know when they’re first starting to think through this, so I appreciate that color. Gene, kind of curious on your perspective, because you are a registered business entity.
Jon: How does this kind of tie into how you think about your business?
Gene: It ties in a lot. So first of all, Travis, you have given complete explanation as to why we should definitely reach out to Swyft and our accountants and our lawyers, because this is like complex stuff and it’s very dry and yet it’s like absolutely critical. This information that you’re providing is really well and I have some specific questions for you. A lot of thought has to go into choosing a business entity. Now, I chose, I’m an S corporation. So that’s, like you said before, that’s for tax filing purposes. I’m also a PC. Right? Like a professional corporation. Can you talk a little bit about what that means and what that is?
Travis: You bet. So PCs really are applicable to licensed professionals. So you’ll see a lot of law firms would have comma PC. And so that is a particular type of entity where if you are required to have a professional license, it’s an opportunity that’s available for you to file as a PC. It doesn’t apply in every single state. Each state has slightly different variances on what the PC rules are. But for… Gene, sorry, I’m just more familiar with law firms than I am accountants and accounting firms.
Gene: That’s fine.
Travis: But a law firm can be an LLC. It can be an LP. It can be an LLP, limited partnership or limited liability partnership. Sorry to use the acronyms there. But it is just another opportunity and a lot of times when you file for those types, the professional corporation, the PC, you do have to submit proof of your professional status, either a bar license or a CPA license, in order to obtain those.
Gene: It’s so complicated, Travis. Like you mentioned about being tax-driven, so if you file your… If you set yourself up as a C corporation and you’re a separate entity, but then if you’re an S corporation, you’re a pass through entity. All these other names of corporations, LLPs, limited partnerships, limited liability companies, professional corporations like mine, they’re all pass throughs. All of these as well. So why are business owners, why do they care? Is this more important for a liability perspective than a tax perspective? Or is it the other way around? What do you think is the main, driving reason that we should be paying such attention to the type of organization that we form?
Travis: I’m going to say it’s the other way around, meaning that, again, it’s more of a tax issue than it is a liability issue. As the lawyer in the room, again, I want your assets protected. Any type of entity you choose, except for a general partnership, which is basically an unregistered partnership, any type of entity that you choose and officially file with the state is going to give you that asset protection. Now, why do people do limited partnerships or limited liability partnerships, things like that? Again, I’ll use Texas as an example, because it’s what I’m used to. 10 years ago, in Texas, limited partnerships didn’t have to file franchise taxes. Well, the legislature is, like Texas, like many other states, is searching for money and so they have changed that, but it was very common 10+ years ago in Texas, that everybody would form LLPs or limited partnerships to avoid franchise taxes that were applicable to LLCs, limited liability companies, and corporations.
Travis: That’s now gone away in Texas and so that’s not a bit motivator anymore here where we’re based, but what I would tell you, lawyers and accountants, we’ve got to eat, right? I don’t like to eat lunch by myself. I love breakfast too, my favorite meal of the day. Most lawyers and most accountants would be happy to talk with you over lunch or breakfast, because we’re not making money on helping you make that decision. We want that longer term relationship to be your advisor. I almost feel like there should be arms of an angel in the background and dogs with sad faces. Like take a lawyer to lunch, right? The poor guys are all by themselves, lonely people. But they’ll be happy, usually, to sit down with you and kind of go over some of these options.
Gene: Got it.
Travis: And then advise you along the way.
Gene: Talk to me about changing. Say I messed up and I chose… I mean, when you’re forming a business, there’s a lot of things going on and sometimes people make the mistake, they’ve chosen the wrong entity for themselves, for whatever reasons. How difficult is it to change from an LLC to an LLP or from an S corporation to a partnership? Like what’s involved?
Travis: Yeah. It’s really not that bad and it’s one of those things where, yes, if you can get it right at the beginning, get it right at the beginning, but you’ll be able to fix it. I do a lot of startup work here in the Houston, Texas area where I’m from and I’ve talked to folks. This gets back to that Delaware C corp. Oh, I’ve got to be a Delaware C corp. I’ve got to be a Delaware C corp. I usually tell them, “Just do a Texas LLC.” If your idea is good enough, you will get that investment. No venture capital or investor has ever turned down a great idea because, oh, you’re an LLC and not a Delaware C corp.
Travis: If necessary, at the time you’re raising the money, two or three years down the road you can always convert from an LLC to a Delaware C corp to a Texas corp and so you can always do that. Paperwork side, again, is not that complicated. It’s called a conversion if you’re switching from one entity to another entity in a state. Reforming as a Delaware C corp, again, it’s not that complicated on the paperwork side. There is sometimes some tax issues involved, and again, I would advise talking to an accountant. Somebody smarter than me, just to make sure that you’re not falling into some tax traps that happen when you switch those types of entities.
Travis: But it’s certainly, you’re not forever stuck with a scarlet LLC across your head if that’s the route you went to keep it simple at the beginning.
Gene: Good. You mentioned locations. Whether you’re setting up as a Delaware C corp or as a Texas LLP. Does it matter where you’re located? I mean, can you… I’m in Pennsylvania. If I started up a business, do I have permission to start up my business as an Arizona company or a Delaware company? I mean, just by opening up a PO Box there and that’s it?
Travis: Yeah. In most states, yes, you can form an entity. Some states require you to have a physical address and some states don’t.
Travis: Swyft Filings has always been based in Texas, but we’re actually a Delaware LLC and we have an office arrangement there so that we have a physical presence there, but yes, you can definitely start in any state you want. That gets back to are there some privacy issues related there as far as what’s disclosed and what’s not. Are you seeking investment? Again, people are just more familiar with the Delaware C corp than they are once you start getting into states like Rhode Island or some of the smaller ones, Montana, that have lower populations, just if you can get rid of the unfamiliarity issue from investors, it may be worth it. But for Main Street businesses, the mom and pop small businesses of the world, it usually doesn’t make that much sense.
Gene: Got it. Travis, so when I started up my company back in 1994, if you were to look up my filings, I filed my company by the name of The Marks Professional Group, but I never go by that. I just call… Everything I do is The Marks Group. My tax returns say The Marks Professional Group, but my website, my branding, everything else is The Marks Group. Should I do a DBA? A doing business as? Does that really matter for me or for any business? What’s the purpose of a DBA?
Travis: Yeah, it does. It can matter, Gene, and the reason it can matter… It also depends on how you’re doing your contracts. So one of the benefits to filing a DBA is that at the state level, the Secretary of State may reject your name availability. The name that you want, because it’s too familiar to some other companies. So you could file with the state of Texas, again, Acme LLC, and they’re not going to let you do that, but you really love the name Acme, so you just do ABC LLC and then you operate to the public as Acme. Well, if you enter into contracts as Acme, there are some courts… It’s not like, oh, you’re sunk. It’s 100% you’re going to lose. But there are some courts in some situations where because you’re using a name that is not your real name, they may not enforce that contract. They may not give you that personal asset protection that we’re talking about, that the lawyers care a lot about.
Travis: So the easiest way to make sure of that is to file for a DBA. If you do that, then the law gives you more protection so that if you’re contracting with The Marks Group, I think you said, if you’re contracting with them and you’re dealing with them, the courts look at that and say, you, customer, or person on the other end of that contract weren’t deceived. You knew you were dealing with a business. They had a properly filed DBA at the county level.
Gene: Oh God. Okay.
Travis: So therefore, there’s no worries. Again, I don’t mean to freak you out, Gene.
Gene: Yeah, you’re freaking me out, Travis. You’re freaking me out. So what do I…
Travis: Like 2% to 1% chances of like that might be an issue somewhere down the road.
Travis: But that’s a big driver as to why people do DBAs when the lawyer comes in and advises it. The other idea is just branding. It just helps solidify the brand and it can keep people at the different county levels from using the same name as you. Then there’s a common law trademark issue as well. It’s just proof that you started using a certain business name at a certain time, which can establish a common law right to that name.
Gene: Got it. Got it. I remember like a doctor telling me I had a 2% chance of losing my hair when I got older, so this is serious. Just very quickly, how do I file a DBA? If somebody is hearing this, like me, and being like, “Oh geez, I should do that,” if we were to reach out to Swyft, you guys take care of those? Is that a complicated process or is that a fairly quick thing?
Travis: Both. We can certainly handle it for you. We do it in, I think there’s over 2,000 counties in the United States and we do them all for you. But the other issue, if you want to DIY, just call your county clerk and ask them what the process is. They’ll have information on the county clerk website. You may be able to do it yourself online. So the answer to that question is both.
Gene: Okay. Fair enough. All right, we’re almost out of time. Just one more question before we leave to go, and Jon, I don’t know if you have anything final, but just you’ve talked about all these different entities, partnerships, C corps, LLCs, S corps, generally what do you find to be the most popular for a typical small business? My rule of thumb is very few small businesses actually file as C corporations or some sort of pass through. What are you seeing?
Travis: Yeah. The last time I looked at it was 85% of our businesses, and we’ve done 300,000, historically, have been LLCs. Again, we’re servicing largely Main Street. Right? We’re servicing the cupcake shop, the landscaping business, the consulting firm that’s just opened up, and it’s for all the reasons we talked to. The tax benefit, the simplicity of it. The LLC is 100% the most common one.
Gene: Got it. All right, that’s great. All right, well, listen, Travis, this was great. Jon, anything else? You want to wrap this up?
Jon: My mind is kind of spinning right now in a whole bunch of different ideas and things, but no, I think that was great information and I think a good kind of 101 to think about how to maybe form your next business or your first one, if you’re listening to kind of get more information on that. Really appreciate your expertise, Travis, as our listeners kind of think through that.
Travis: Oh, it’s been my pleasure. I hope we didn’t make it so complicated and that the listeners are still with us, but it is important and there’s a lot of good information out there to read up on it, on your own. Sometimes it’s better with charts and graphs and those are all available on the SwyftFilings.com website.
Jon: Awesome. So thank you everyone for listening. This has been another episode of Small Biz Ahead. The small business podcast presented by The Hartford. We appreciate your time and attention and we’ll catch you on the next one.
Gene: Take care, everybody.
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