People choose
LLC's because there is - liability protection
without the corporate formalities; easy management
and maintenance
People choose the
S-Corporation because - They want Prestige and
flexibility of the Corporation without double
taxation
People choose the
Regular Corporation because - they are making a
profit and don't want to transfer this income to
their personal tax return
Most people choose between the LLC and "S"
Corporation because they are more "user friendly".
Sole Proprietorship
A Sole Proprietorship
(also known as a "DBA" - Doing Business As , or a
"fictitious name") is a business with one owner. A
business organized as a sole proprietorship is not
separate from its owner, merely a different name that
the business owner operates under. The owner is
personally liable for the company and its debt; all
income is added on the owner's personal tax returns
(pass-through taxation).
PROS: Easy to
setup, easy to maintain.
CONS: Owners are
personally liable for the company and its debt
( you could lose your house, cars, personal assets,
etc.) in a lawsuit. Usually not recognized at the
State level, only in your city/county.
Partnership
A Partnership is
essentially the same as a Sole Proprietorship, except
there is more than one person involved. The owners are
personally liable for the company and its debt, income
is distributed equally and is added on each owner's
personal tax returns. Sometimes the partners will
enter into a "partnership agreement" that details
ownership and responsibility.
PROS: Easy to
setup, easy to maintain.
CONS: Each
partner is personally liable for the company and its
debt. Disputes, ownership issues and disagreements
not addressed by a partnership agreement can be
difficult to remedy.
Limited Liability Company (LLC)
A Limited Liability
Company is best described as a hybrid between a
corporation and a partnership. It provides easy
management and "pass-through" taxation (profits and
losses are added to the owner (s) personal tax
returns) like a Sole Proprietorship/Partnership, with
the liability protection of a Corporation.
Like a corporation, it
is a separate legal entity; unlike a corporation,
there is no stock and there are fewer formalities.
The owners of an LLC are called "Members", instead
of "Shareholders". Basically, it's a like a
corporation, with less complicated taxation and stock
formalities.
The
main part of a
Limited Liability Company is known as the "Operating
Agreement". This document sets the rules for operating
the company and can be modified as the business grows
and changes.
Operating an LLC is less formal than a corporation,
usually only requiring an Annual Member's Meeting and
ratifying changes to the Operating Agreement.
PROS:
Provides the liability protection of a corporation
without the corporate formalities (Board Meetings,
Shareholder Meetings, minutes, etc.) and extra levels
of management (Shareholders, Directors, Officers).
Taxed the same as a Sole Proprietorship (1 Member LLC)
or Partnership (2 or more Members).
CONS: Usually
more expensive to form than a Sole Proprietorship or
Partnership, requires more paperwork and formal
behavior.
Easy management and
limited compliance requirements have made the LLC the
user-friendly solution for small business.
Corporation (or C Corporation)
A Corporation is a separate legal entity that can
shield the owners from personal liability and company
debts. As a separate entity, it can buy real estate,
enter into contracts, sue and be sued completely
separately from its owners. Also, money can be raised
easier via the sale of stock; its ownership can be
transferred via the transfer of stock; the duration of
the corporation is perpetual (the business can
continue regardless of ownership;and the tax
advantages can be considerable (i.e. you are able to
deduct many business expenses, healthcare programs,
etc. that other legal entities are not). Income is
reported completely separate via a tax return for the
corporation.
A corporation
structure:
1. Shareholders Own the Stock of the Corporation
2. Shareholders Elect Directors (known as the "Board
of Directors")
3. Directors Appoint Officers (President, Secretary,
Treasurer, etc.)
4. Officers run the Company (day-to-day operations)
In many cases (especially during the startup
phase), you will be the 100% owner of the stock,
therefore you elect the directors (usually yourself)
and then appoint yourself as an officer (or all the
officers: CEO, Treasurer, Secretary).
The rules for
operating your Corporation are set in what are called
Corporate By-Laws. This document sets the rules
for the company and can be modified as the business
grows and changes.
Operating a Corporation involves at the minimum
holding a yearly Directors and Shareholders meeting
(the location is determined by you and the expenses
are deductible), keeping written Minutes of major
company decisions and maintaining general Corporate
Compliance as dictated by the Corporate By-laws.
PROS:
The oldest, most successful and most prestigious type
of business entity; provides personal liability
protection; conveys permanence, can reduce taxes
(lower tax rate on retained profits, items like
healthcare, travel and entertainment are deductible).
CONS:
More expensive to setup than a Sole Proprietorship or
Partnership; more paperwork and formality required
than an LLC (holding Board meetings, keeping minutes
and resolutions).
Corporation is still the
oldest and most prestigious form of entity. C
Corporations are taxed at a lower rate on profits and
are able to deduct items like healthcare, travel,
entertainment, etc. that LLC's and S Corporations
cannot. More complicated tax and management issues
than an "S Corporation".
The S-Corporation (or Small
Business Corporation)
After a
corporation has been formed, it may elect "S
Corporation Status" by adopting an appropriate
resolution and completing and submitting a form to the
Internal Revenue Service (some states require their
own version). Once this filing is complete, the
corporation is taxed like a partnership or sole
proprietorship rather than a corporation. Thus, the
income is "passed-through" to the shareholders for
purposes of computing tax returns.
Most new small corporations elect S-Corporation
Status (90%+) so profits and losses can be added
to the shareholders personal tax returns without
having to pay taxes on profits once, then again when
they are given back to the shareholders as income
(dividends). This is known as "double taxation" and is
the reason why S-Corporations were created.
An
S-Corporation can also revert back to regular
Corporation status fairly easily.
There are some limitations on S-Corporations: they
cannot deduct some expenses like health insurance,
travel, entertainment, etc. that normal corporations
can. Also, they are restricted to 75 shareholders or
fewer and those shareholders must be U.S. Citizens.
PROS: Prestige
of the Corporation without the double taxation. Ideal
for "1 person corporations".
CONS: More
expensive to setup than a Sole Proprietorship or
Partnership; more paperwork and formality required
than an LLC (holding Board meetings, keeping minutes
and resolutions).
Though taxed in a similar manner to
LLC's, still requires the corporate formalities of a
regular Corporation (Shareholders, Officers, Directors
& Board/Shareholder meeting, minutes, etc.)
