Miscellaneous

C-Corp

by

Sole proprietorships and partnerships are not separate legal entities and are considered to be the same as the owner(s). Corporations are separate legal entities that are owned by shareholders. The C corporation is a standard corporation, and is a very common business structure. In order to form a corporation, certain documents must be filed with the state and the state filing fees be paid. These documents are usually called the articles of incorporation or a certificate of incorporation.

The primary advantage of incorporating a business is the limited liability the corporate entity affords its shareholders. Typically, shareholders are not personally liable for the debts and obligations of the corporation; thus, creditors will not come knocking at the door of a shareholder to pay debts owed by the corporation, unless the shareholder(s) has guaranteed the debt. In a partnership or sole proprietorship the owner’s personal assets may be used to pay debts of the business.

Other advantages of incorporating a business include:

  • Incorporating may establish credibility for a new business with potential customers, employees, vendors, and partners;
  • The ownership of a corporation is easily transferable through the sale of stock;
  • Corporations have unlimited life extending beyond the illness or death of owners;
  • Certain expenses, such as insurance, travel, and qualified retirement plans are typically tax-deductible; and
  • Additional capital can be easily raised through the sale of stock (shares) in a corporation.

The main disadvantage to forming a C corporation is often considered to be the potential for double taxation. C corporations are considered separately taxable entities by the Internal Revenue Service (IRS), and taxes must be paid on the profits of the corporation. If a corporation then distributes its profits to shareholders in the form of dividends, the dividend income is also taxed as regular income to the shareholders. In this case, the corporation’s profits are taxed twice, first as income to the corporation and second as dividend income to the shareholder, creating the “double-tax.”

However, not all income a shareholder receives from a C corporation is subject to the double tax. For example, if the shareholder is also an employee of the corporation, that shareholder will most likely receive a salary payment from the corporation. As long as the salary paid to the shareholder is considered by the IRS to be reasonable (or similar to the market salary rates for that position), it is treated as a business expense and is deductible to the corporation. This helps reduce the amount of taxable income the corporation has.

In order to eliminate the possibility of double taxation, C corporations can elect to be taxed as an S corporation with the IRS. With S corporations, the profits and losses of the corporation are reported on the individual tax returns of the shareholders, and any necessary tax is paid at the individual level. This taxation method is called “pass-through” taxation, since the profit or loss of the corporation is passed through to the shareholders.

Other aspects of C corporations that can be considered disadvantages include:

  • Corporations are more expensive to form than sole proprietorships and partnerships.
  • There are more corporate formalities, such as annual paperwork, and more state and federal rules and regulations, than with sole proprietorships and general partnerships.

When evaluating whether the corporate structure is right for your particular business, it is advisable to first determine the goals of your business, and then to assess the advantages and potential disadvantages of the different business structures in relation to those goals. You may also wish to seek the advice of an attorney or accountant.

Forming a corporation is inexpensive and easy. Get an instant quote to incorporate your business.

LLC

by

The limited liability company (LLC) is a distinct business entity that combines the corporate advantage of limited liability protection with “pass-through” taxation, the method of taxation afforded to both general partnerships and S corporations.

Like corporations, LLCs come into existence after making a filing with the appropriate state body, typically the Secretary of State, and paying the necessary state filing fees. There are several online services that will manage the process for you at very reasonable prices.

In terms of taxation, the LLC’s income is not taxed at the entity level as is that of a C corporation. While the LLC does complete a tax return, the income or loss of the LLC as shown on this return is passed through the LLC and is reported on the owners’ individual tax returns. The LLC’s owners then pay taxes on the LLC’s profits at the individual tax level. LLCs can elect with the Internal Revenue Service (IRS) to be taxed like a C corporation, but this is not overly common.

Other advantages of LLCs include:

  • Members are typically not held personally responsible for the debts and liabilities of the company.
  • Forming an LLC can help establish credibility for a new business with potential customers, employees, vendors, and partners.
  • There are generally no restrictions on the number of members allowed.
  • LLCs have flexibility in structuring the management of the company.
  • LLCs do not require as much annual paperwork or have as many formalities as corporations and S corporations.

Some disadvantages of LLCs include:

  • LLCs are more expensive to form than sole proprietorships and general partnerships.
  • LLCs face more ongoing requirements, such as state annual report filings, than sole proprietorships and general partnerships.
  • Ownership is typically harder to transfer than with a corporation.
  • Because the LLC is a newer business structure, there is not as much case law to rely on for determining precedent.

Regarding the ownership of an LLC, the owners are called members. Members are analogous to shareholders in a corporation or partners in a partnership, depending on how the LLC is structured. Members will more closely resemble shareholders if the LLC utilizes a manager or managers because the members will not directly participate in the management of the LLC. If the LLC does not utilize managers, then the members will more closely resemble partners because they will have a direct say in the decision-making of the company. An LLC must specify at the time of formation whether it will be managed by members or managers.

A member’s ownership of an LLC is represented by “membership interest,” just like a partner’s interest in a partnership or a shareholder’s shares of stock in a corporation.

When evaluating whether the LLC is the right business structure for your particular business, it is advisable to first determine the goals of your business, and then to assess the advantages and potential disadvantages of the different business structures in relation to those goals. You may also wish to seek the advice of an attorney or accountant.