For an aspiring entrepreneur the path towards growth is to attract capital for business. Investors generally look for a few qualities in the business they want to invest. For any investor, the return on investment is the foremost criterion. The returns can be in the form of regular cash flow or appreciation in the value of investment. For attracting such investors, the best form of business is a corporation. The advantage of a corporation is that the shares are freely transferable. The investor can invest or divest in a corporation and there are very few formalities to be observed. Another advantage of a corporation is the personal liability protection it offers to the shareholder. Due to these advantages, investors are readily willing to invest in corporations and hence the ease in attracting capital for expansion.
The state laws govern the incorporation of your small business. The incorporation rules vary in each state. The key procedure for incorporating a business is to file a certificate of incorporation with the state and pay a filing fee. In some states the certificate of incorporation is also called the articles of incorporation. The ownership in a corporation is structured as units of stock or shares, which is subscribed to and promised to pay for by the shareholders. The corporations can be of two types namely an S Corp or a C Corp. The basic legal structures of both forms are similar. The main differences are the share holding and taxation. Shares in an S Corp are restricted to natural US citizens and limited to a maximum of 100. There are no such restrictions in a C Corp. C Corporations are subject to corporate taxation where as the S Corporation advantage is that the profits are passed through to the share holders and taxed as their personal income.
Limited Liability Companies also offer personal liability protection to its owners who are called members. The advantage in LLC Vs. Corporation is that in the eyes of the general public, corporations are ‘perpetual’. LLCs are considered to be bound to the life of its members. One advantage in LLC is that procedure for taxation can be decided by the members and they can elect to be taxed as a partnership or a corporation. The advantage in LLC Vs. S Corp is that LLCs are relatively easy to form and less cumbersome to operate. Members of an LLC can elect to be taxed as an S Corporation and avoid the double taxation of a C Corporation.
The advantage in LLC Vs. S Corp is that LLCs are relatively easy to form and less cumbersome to operate. Members of an LLC can elect to be taxed as an S Corporation and avoid the double taxation of a C Corporation.
Incorporating your company shows your seriousness and can be essential when raising venture capital from businessmen like Rick Bolander and angel investors.
Choosing the right business structure for your business is important for many reasons. You have to consider a business form according to your unique situation that offers flexibility but provides personal liability protection. There are a few legal forms of business that offer both advantages. Corporations, Limited Liability Companies, Limited partnerships and Limited Liability Partnerships offer limited liability options to business owners. In limited partnerships, a general partner will have to assume personal responsibility for all the partnership’s business obligations. Limited Liability partnership limits personal liability of all partners but is restricted to specific professions or businesses in many states.
LLC definition is limitation of personal liability of the business owners. Limited Liability Companies offers limited personal liability and flexibility in management when compared to a Corporation. The member(s) of the LLC have the ease of management and administration of business as in a general partnership without its unlimited liability of partners. Another advantage with LLC is that you can choose the tax classification in which your business is to be taxed. If a single member LLC, you are by default treated as a sole proprietorship. Multiple member LLC’s can elect to be taxed as a partnership, C Corporation or an S Corporation.
Business owners in a Corporation are called share or stock holders and have limited personal liability. The share holder’s liability is limited to the capital invested by them in the business. Corporations are expensive to form and operate as the formalities and procedures involved are elaborate. Formal share holder meetings have to be held, the board of directors and officers elected, the proceedings formally recorded etc. Corporations can be a C Corporation or an S Corporation but the formalities involved are similar. A C Corporation is subject to corporate income tax whereas the S Corporation has pass through taxation. C corps have to pay tax on its income directly and when the profits are distributed to the share holders as dividend, they have to report the dividend as income in their personal tax returns and pay tax on it if applicable. S Corporation advantage is that, the income passes through to the share holders who pay income tax as their personal income.
The main difference between and LLC and a Corporation is that LLC’s are easy to form and operate when compared to a Corporation. In LLC vs. Corporation, LLC continuity is uncertain whereas the corporation has a separate existence from that of its share holders and ownership can be easily transferred. In LLC vs. S Corp, both has the advantage of pass through taxation but the operation of an S Corp. is formal and tedious in comparison.
LLC taxation is no different from any other business entity taxation. In reality, llc definition does not have an individual tax classification at the Federal or State level. Limited Liability Company owners can elect to be classified in any of the other business entity tax classification convenient to them. A single owner LLC is by default classified and taxed as a sole proprietorship. Multiple owners LLC can elect to be taxed as a partnership or a corporation. If elected to be taxed as a partnership, the income from business should reflect in each partner’s tax returns. When taxed as a corporation, tax on the business income has to calculated and paid through 1120 form. In Federal and state taxation, the differences in LLC vs S Corp taxes are that LLC can elect to be taxed as convenient to the members and beneficial to the business, while the S Corp passes through it profits to its shareholders who in turn reflects that in their personal tax returns and pays taxes accordingly.
A single member Limited Liability company when elected to be taxed as a “disregarded entity” (which means the LLC has no separated existence from that of LLC owner for tax purposes) profit from active trade or business is subject to self employment tax. The single member should report the business income in a schedule C tax form and pay the self employment tax based on Schedule SE Tax form. Where the LLC is not engaged in active trade or business and only a passive source of income such as income from investments or deposits, no self employment tax is payable. When a multiple member LLC engaged in active trade or business elects to be taxed as a partnership, the partners pay self employment tax on their share of profits and report the business income through a 1065 form. In an LLC elected to be taxed as a corporation, no self employment taxes are applicable on amounts paid as wages to the members but such payments will be subject to payroll taxes.
Where the LLC is treated as a disregarded entity or a partnership for tax purposes, no payroll taxes are applicable to profits distributed to the members and where no employees are engaged in the business. In LLC’s treated a C Corporation for tax purposes, any amount paid to members other than profits are subject to payroll taxes. For finer details on LLC taxation, consulting a corporate law firm will be prudent. They will be able to guide you on the most beneficial way to be taxed based on your business activities and LLC operating agreement.
One argument that you will find among businesspersons is the LLC vs S Corp. The LLC vs S Corp argument is designed to convince people that either the LLC or the S Corp is a better choice for a business structure. To help determine which structure would be better for your business you will need to learn about the advantages and disadvantages of each structure.
The first thing that comes to mind with the LLC vs S corporation argument is the how they are structured. In order to qualify as an S Corporation the corporation must have a maximum of 75 shareholders. The shareholders cannot be other corporations or businesses, the shareholders must be an individual. With an LLC, you can have as many members as you want; there is no minimum or maximum amount of members. Another advantage of the LLC is that the members of the LLC can be other businesses, including LLCs.
Another basic LLC vs S Corp argument that you will find is the S Corp has an independent life when compared to the LLC. With an LLC if one of the members dies or retires than the LLC is going to cease to exist. With an S Corp if one of the shareholders dies or retires the S Corporation can still exist. In most cases, the S corporation can continue with their normal operation of business without being disrupted by the death of one or more shareholders. With an LLC, you can arrange when first forming the business about what will happen to the LLC if one member wants to sell their share of the business, but in most cases the LLC dissolves and you must reform.
Another argument that needs to be considered when deciding between these two business structures is the LLC vs S Corp tax methods. Both the LLC and the S Corp allow pass through taxation, which is the biggest difference between the S corporation and a regular corporation. In an S corporation, the corporation is taxed like a partnership and the corporation pays no income taxes. The profit or loss is passed through directly to the stockholders. With an LLC, all of the profits, losses, and expenses flow through the company to each individual member. What most people are trying to avoid is the double taxation of the corporate structure, but in some cases that can be an advantage.
Another disadvantage that you face with an LLC is that you cannot take your business public. If you have any plans to take your business public in the future, no matter how far into the future that might be, it is in your best interest to avoid the LLC structure. If you choose an S Corporation, you will be able to take your business public and still reap the tax benefits of an LLC.
Another thing that comes up is the single member LLC vs S Corp argument. The reason that this comes up is people feel that a single LLC provides advantages over an S Corp or vice versa. The biggest difference between a single member LLC and an S Corp is the number of members or shareholders that each one has. An S Corp cannot be formed with only one member; where as the S Corp requires corporate officers and shareholders to run the business.
