The legal structure you choose for your business should be in consideration of the risks and benefits it offers. Simply because a business structure has a few advantages over another, it is not prudent to adopt a business structure without weighing the pros and cons carefully. Likewise, choosing between an LLC or an S Corp depend on your business activities. Both the legal forms LLC or S Corp offers limited liability protection to its business owners, members in LLC and share holders in S Corp. Basically the holding structure is significant in adoption of LLC or S Corp for your business.
Limited Liability Company or LLC can be constituted with a single or multiple members under state statute. LLC is a relatively new form of business structure. Internal Revenue Service has not created a new tax classification for LLC. A LLC is still classified as a Sole Proprietorship, Partnership or Corporation for taxation purposes and the choice to elect the tax classification is left to the members. LLC members can be natural persons, other business entities and even aliens. In most of the states there are no restrictions on ownership. LLC provides the benefit of limited liability as a corporation with the flexibility of management and operations as a Partnership. LLC can elect to have pass-through taxation as in a partnership or sole proprietorship. Members can report their pro rata share of the LLC profit or loss in their personal tax returns and pay tax if applicable. Unless otherwise restricted in the Articles or Organization or Operating agreement, the membership in a LLC is easily transferable.
An S Corporation is no different from a C Corporation in form and structure. S Corporations are constituted by shares, which are easily transferable unless otherwise restricted in the Articles of Incorporation. The ownership has a few restrictions. S Corporations cannot have more than 100 shareholders; all shareholders must resident citizens and natural persons. There can only be one class of shares and dividend has to be distributed in proportion to the share holding. The main difference between a C and S is in taxation. C Corporations are subject to corporate taxes and have to pay tax on its profits. When the profits are distributed as dividend to share holders, they have to pay income tax on that which essentially is double taxation. S Corporations do not pay corporate tax but the shareholders report the profit in proportion to their share holding in their personal tax returns and pay tax. In LLC Vs. Corporation, the major advantages of LLC lie in its unrestricted ownership and flexibility in management. Corporations are subject to many formalities in incorporation and operations.
Forming a corporation is a bit more complicated than forming a limited liability company; it is also more expensive. Choosing to incorporate your business instead of forming an LLC is usually done because for some businesses a corporation provides better tax advantages than a partnership does. Both a corporation and an LLC are protected under the corporate veil, so the deciding factor is usually the tax benefits.
If you are thinking about incorporation, you will need to learn how to form a corporation. Learning how to form a corporation is easy, you can often do everything yourself. Here are the steps you will need to take to form a corporation.
Step one:
You will need to come up with a name for your corporation. When choosing a name for your corporation you will need to comply with the rules of the state that you are incorporating in. Most states will require you to use a unique business name, it cannot be the same or similar to any business names already on file with the corporations office. To prevent this you will need to perform a name search before forming your corporation. The name also has to have a corporate designator in it, such as Corporation or Inc. You also must avoid certain words that might suggest your corporation is involved with the federal government or is a restricted type of business.
Step two:
You will need to appoint directors for your corporation. When appointing directors for your corporation you want to keep in mind that the directors are going to be making the major policy and financial decisions for the corporation, so you want to choose wisely. The directors do not have to be the owners of the corporation, but most corporation owners appoint themselves as directors before the corporation opens. How many directors your corporation can have depends on the number of owners and the state you incorporate in.
Step three:
You need to prepare your articles of incorporation. The articles of incorporation do not have to be complicated; you can often do them yourself. If you do not think you can do them on your own you can hire a company or a lawyer to help you prepare them. The articles of incorporation need to include a few basic details about your corporation. The main thing it needs to include is the name of the corporation, the address of the corporation, the name of the corporation’s directors. You might also need to include a registered agent for the corporation; this is true if none of the directors is listed in the articles of incorporation.
Step four:
You will need to file the articles of incorporation after you have prepared them. When filing the articles of incorporation you will need to pay a filing fee that ranges from $100 to $800 depending on what state you are incorporating in.
Step five:
You will need to draft the corporate bylaws. The corporate bylaws are the rules that your corporation is going to follow so that it can smoothly operate. The corporate bylaws include when and where the corporation will have meetings, what the voting requirements are, and anything else that deals with the day-to-day running of the corporation.
Step six:
You will need to hold a meeting for the board of directors. The reason this meeting needs to be held before your corporation does business is that you need to make a few decisions that deal with the running of the corporation. At this meeting, you need to set the corporation fiscal year, appoint corporate officers, adopt the bylaws, adopt a corporate seal, and make the decision about issuing stock.
Step seven:
You need to issue the shares of stock based on the decision in the board of directors meeting. Issuing the stock is a way to divide the ownership of the corporation, but it is also a requirement of doing business as a corporation. If you want, the protection that is offered to corporations you have to act like a corporation at all times.
