The LLC provides, the opportunity for tax benefits, requires less paper work, is less expensive than a Corporation to set up and it has better business asset protection against the claims of personal creditors.
In order to determine the right business form for you it is necessary to understand the choices available and how they will impact your financial success. Important factors to consider are how easily or difficult it is to set up the form, the tax consequences, and possibly the most important factor, personal liability.
Wyoming enacted the first LLC legislation in 1977. Other states followed with legislation but LLCs were not widely known and accepted until the IRS finally ruled on the LLCs tax status in 1988. They are now one of the most popular business forms. In many states the number of newly formed LLCs exceeds the number of corporations formed in a year. The Limited Liability Company is available in 50 states and is the fastest growing business form in the United States. It is a separate, distinct, legal entity as is a Corporation, a General Partnership or Sole Proprietorship.
WHAT IS AN LLC (Limited Liability Company)?
Is it the right choice for you?
The Limited Liability Company is one of the newer business forms. It is not a separate taxpaying entity. Income is reported on the owner or owner's personal tax return.
Completing the necessary documentation for the state, which is called the Articles of Organization, and paying the required fees is all that is necessary to set up an LLC. An LLC may be formed in any state. Massachusetts requires at least two members to form an LLC; all other states allow an LLC with only one member. Usually an operating agreement is drawn up such as one in a partnership, it should state the duties and obligations of the members, how the LLC will be managed and how the profits are to be divided and how member's interests may be sold. Many people form LLCs in their home state.
This may save money because you do not have to register as a "foreign LLC". If your home state has high annual LLC fees or income taxes and your LLC does not "do business" in that state then you may want to chose to form the LLC in another state. Probably the most important advantage of an LLC is the protection of personal assets it affords its members.
A corporation or LLC affords more protection than the sole proprietorship or partnership. Creditors and legal judgments do not involve member’s personal finances. They can only lose the amount they invested. The LLC is not subjected to double taxation. Profits and losses are passed to the owners of the LLC and the owners are taxed on their tax return. Law does not require record keeping as with C and S corporations and there is flexibility in dividing assets of the business if the LLC is dissolved as well as with distribution of how profits are divided. If the LLC has only one member it can be taxed as a sole proprietor. It can also be taxed as a partnership or corporation, the owners will make personal quarterly estimates, but they only have to actually calculate and file their self-employment tax with their personal tax return. The name of persons LLC must end with the words “LLC”, “L.L.C.”, and “Ltd. Liability Co., or “Limited Liability Company”. It does not have the “prestige” of the corporation signature. The LLC is probably not a good choice for you is you intend to grow your business to the point of having many owners and becoming an IPO.
More on LLC'S
GENERAL PARTNERSHIP: According to civil law a partnership is a contract between persons who agree to cooperate and carry on a business, contribute to it by combining knowledge, property, and effort and to share in its profits. It is created with two or more persons and needs only a verbal agreement or handshake. A partnership agreement should always be created. In some instances these agreements may be registered and available for public inspection.
All partners share income and losses in the general partnership and are given certain tax benefits. The main disadvantage is probably that the partnership has a strict liability to third parties injured by the partnership. All partners are jointly liable for the debts and or judgments of the partnership. If one of the partners commits to a business venture in the name of the company each partner could be personally liable for the business' obligation resulting in huge personal financial risk.
LIMITED PARTNERSHIP: One or more partners contribute to the business; they do not participate in management of the business. The limited partner or partners are silent partners and are liable only to the investment they have made. Their position is similar to that of the shareholder in a large publicly traded corporation. They have no day –to-day responsibilities of running the partnership. They receive income, capital gains, and tax benefits.
The general partner collects fees and a percentage of the capital gains and income. To form a limited partnership a Certificate of Limited Partnership is filed with the office of the secretary of state. The limited partnership retains the tax benefits but at least one person remains exposed completely for the partnership debts and judgments. They could lose their personal assets if the business assets were not sufficient to satisfy creditors or legal judgments.
REGULAR CORPORATION: A corporation is a separate legal business form and its legal obligations and tax status is separate from its owners. . Articles of incorporation are filed with a state agency
The corporation is governed by a set of by-laws, regular meetings must be held. Shareholders elect or choose a board of directors to manage the business for them. It can provide shareholders some protection against creditors of the corporation but not is all instances. The corporate creditors cannot attach the shareholders assets that are not invested in the business but there is a price to pay for this. A regular corporation is taxed as if a separate person and the shareholders receive only the earnings of the corporation after the corporation has paid the taxes. For the small corporation it is possible to minimize or eliminate these taxes by paying employee-owners a salary, which is a legitimate business expense and is tax deductible.
The advantages of a corporation include the ability to transfer or sell ones shares; upon the death of one of the shareholders the corporation continues to exist. It is most appropriate for a company that plans to have more than 30 stockholders or to trade publicly. The record keeping requirements must be maintained to insure the corporation continues to have its limitation of liability status. It can be costly to set up a corporation and corporation funds must not be mixed with personal money. If the corporation has a net loss the shareholders are not able to claim this loss on their personal tax returns. The corporation pays taxes on its profits and the shareholder must pay taxes on the dividends they receive. If you need additional information about Limited Liability Companies or other types of corporations/companies, please give us a call toll-free at: 1-888-929-4424
S CORPORATION:The S Corporation is a C Corporation that meets certain requirements under Subchapter S of the Internal Revenue Code. It has a special tax designation that allows the income and expense of the corporation to be ignored at the corporate level so that the shareholders pay taxes on the net income earned and claims all losses of the corporation as their own. For the small corporation it is possible to minimize or eliminate these taxes by paying employee-owners a salary, which is a legitimate business expense and is tax deductible. The corporate tax rate is lower than the highest personal income tax rate with corporations and there are other benefits available to corporations that may not be available to other business forms.
The rules that govern S Corporations make them unavailable and unattractive in a lot of situations. All shareholders must be U.S. citizens, have no more than 75 shareholders, may not be a bank, thrift or insurance company, and must have a fiscal year that ends on December 31 of each year. All the shareholders must agree with the S corporation status. As with a regular corporation the record keeping requirements must be maintained to insure the corporation continues to have its limitation of liability status.
If you expect profits to be enough higher than fair market salary to justify the additional payroll record-keeping costs, then S-corporation makes
NON-PROFIT CORPORATION: This is a corporation that is an option for a group or individual who are seeking “non-profit” tax-exempt status.
PROFESSIONAL CORPORATION: This form of corporation is reserved for businesses that require a professional license such as doctors, dentists, attorneys, and engineers.
SOLE PROPRIETORSHIP: The sole proprietorship is the most simple business form. The sole proprietorship is limited to one person. If you die the assets will go to your heirs but the business will no longer exist. The cost and ease of setting it up and simplicity of administration along with the tax benefit are the advantages.
There are disadvantages however. All of the business assets as well as personal assets are at risk. Creditors can go after your personal assets, home, savings, etc. if there are insufficient funds in the business. The same is true if there is a legal judgment for damages. If it belongs to you, they can attempt to acquire it!
If you need any additional information about Limited Liability Companies or other types of corporations/companies, please give us a call toll-free at 1-888-929-4424
The information above is provided as an educational guide to assist with understanding the basic concepts of different business forms in order to choose the one that best meets your needs. It should not be construed as legal or financial advice. E Net Finance Inc. does not render accounting, legal, or other professional services. The services of a competent professional person should be sought if legal advice or expert assistance is needed.
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