Starting up a new entity is always an exciting venture. New business owners have a formidable task ahead of them when they start the process of getting a business or nonprofit set up and properly organized. One of the first decisions they need to make is what type of legal structure the entity needs in order to comply with tax filings. Getting the right entity structure in place also puts the business on track for the best chance of financial and operational success.
Different types of entities have their own rules for legal and regulatory compliance, governance, management and the board of directors. The most common types of business structures are:
- C corporations
- S corporations
- Limited liability companies (LLCs)
- Sole proprietorships
- Nonprofit organizations
What kinds of things do business owners and boards of directors need to be aware of? All entities need to be aware of registration renewal filings, federal tax deadlines, state tax deadlines and other regulatory matters, which vary by state law and type of entity.
Entities that have a good organizational platform for managing their systems and documents will better be able to manage their entities by staying in sync with their legal and fiduciary responsibilities.
An Overview of Entities by Type
C corporations are the most common type of corporation in the United States. C corporations have the ability to grow their profits by selling their stocks. This type of corporation can have an unlimited number of shareholders, and it remains a corporation even if the owner leaves the company. The board of directors, officers, shareholders and employees have limited financial liability. C corporations have the tax advantage of being able to deduct business expenses. On the downside, C corporations get taxed at the company level and on shareholder dividends, which means they are essentially double-taxed. C corporations are subject to more government oversight because of the risk to their shareholders.
There are a lot of similarities between S corporations and C corporations. Both need to file articles of incorporation and both need to have shareholders, directors and officers. Unlike C corporations, S corporations are not double-taxed. This structure has limitations on the types of shareholders it is allowed to have, and it is limited to a maximum of 100 shareholders.
Limited Liability Companies (LLCs)
Owners that want to separate their personal assets from their business debts may find that an LLC is the most appropriate business structure. LLCs are not required to have boards of directors, hold annual meetings or record minutes, and there is no limit to the number of owners.
Partnership structures are easy to form and to operate. Usually, partners are not even required to file their entity with the state. Partners simply report their share of profit and loss on their personal tax returns. Partnership owners need to be aware that they are personally liable for any lawsuits.
The sole proprietorship is the simplest form of entity structure. It doesn’t require a state filing. Similar to partnerships, sole proprietors report profits and losses on their personal income tax returns. Owners are personally liable for lawsuits filed against the business.
Boards of directors govern nonprofit entities. Small nonprofits are not taxed, and the board has accountability for managing the entity, including maintaining tax filings.
What Is Entity Management?
Regardless of the type of entity, all boards or owners have regular, recurring duties that they need to perform to manage their entities, so that they remain compliant with state and federal laws. Common duties include:
- Renewing the entity’s registration
- Filing quarterly IRS taxes
- Filing state taxes
- Renewing DBA filing with the county
In addition to filing quarterly or annual reports with governing bodies, many entities need to be able to quickly provide information internally. Management, board directors, audit committees and regulators often need information quickly upon request. Internal finance, tax and legal departments may also need access to data about corporate registrations, charter documents and annual meeting records during various business cycles in real time.
How to Effectively Manage an Entity
Technology is the enterprise’s best friend, because businesses operate according to identifiable cycles. Many of today’s entities are utilizing business and board software to help to keep costs down, manage risks and maintain compliance in the face of rising regulatory challenges. What exactly can software do for entities?
Software designers offer basic programs that contain the most elementary tasks that entities need to manage their operations. Many of these programs also have some flexibility to customize a master plan according to the needs of the business.
Software programs can help entities stay current with fiduciary, regulatory and statutory concerns to alleviate liability risks for their directors, officers, managers and partners. Software programs serve as an electronic filing system for storing reports and documents, recording transactions and complying with audits. Many software programs update in real time so that internal departments can easily access the information they need on a timely basis.
Software programs have the added benefit of having built-in security programs to protect important and confidential information.
How Are Publicly Traded Corporations and Small Businesses or Nonprofits Managed Differently?
There are several ways to separate small businesses from large corporations. The U.S. Small Business Administration considers businesses with fewer than 500 employees or less than $7 million in profits to be small businesses. The differences in how to manage them lie with how the entity gets taxed and who is liable for debts and other liabilities.
Sole proprietorships and partnerships accept responsibility for business debts and for paying company taxes. Small businesses like these need to accurately record their profits and expenses so that they pay the appropriate amount of taxes. They also need to document their activities carefully to protect themselves and their families from undue loss and legalities.
With few exceptions, nonprofit entities don’t have to pay taxes, but they are not without liability. Nonprofit boards of directors still have legal and fiduciary responsibilities toward their members and other stakeholders. Managing their entities focuses more on managing their assets responsibly and maintaining an accurate and highly organized document system.
Large companies and corporations often have outside investors and monies from venture capital firms. C corporations have a business structure that offers them the benefit of having unlimited profitability through selling shares of stocks. The trade-off is that they are more heavily regulated to protect their investors and shareholders, and they are more heavily taxed than smaller businesses. Being subject to stronger regulations and risking their shareholders’ investments make it vitally important for large corporations to actively manage their entities according to compliance and best practices for corporations.
Some Final Thoughts About Managing Entities
Regulations surrounding all types of entities are ever-evolving and increasingly sophisticated. Whether the managing entity is a direct owner or a board director, the main focus is on financial sustainability while protecting the owners and organizations from unnecessary loss.
Advances in technology are an enormous asset for managing accurate, high-quality and timely documents with the lowest cost.