When starting a business or taking it to the next level, the choice of entity and structure is important. Most business formations involve establishing either a corporation or a limited liability company (i.e. an LLC). A corporation can be either a C-corporation or an S-corporation and an LLC can be single-member or multi-member. All these entities provide limited liability protection to its shareholders or members provided important steps are taken.
An LLC is more flexible, less formal, generally involves less paperwork, ownership meetings and more suitable for ownership, management, and operation of rental real estate properties.
A corporation is less flexible, more formal, requires more paperwork, stock issuance, minutes, board and shareholder meetings and is more suitable for business operations involving employees, product manufacturing and/or sales.
An S-corporation is a pass-through entity that pays no Federal income tax and a much lower state income tax. Losses pass through to the individual shareholders in most circumstances and are generally best for smaller businesses. At least one employee is required to report compensation and pay payroll taxes. Distributions are generally not taxable so money can be taken out of the corporation easily.
A C-corporation pays both Federal and state income tax, also requires at least one employee and is generally best for larger businesses. Losses do not pass through to individual shareholders and money can only be taken out of the corporation in the form of a dividend which is also taxable to the shareholders (i.e. the second or “double” taxation).
All business entities (LLCs and corporations) must file income tax returns each year with the IRS and state government tax department.
Effective management, separate operation as a business entity, and proper and timely tax compliance are all important concerns that must be taken into account when forming a new business entity. Proper planning at the outset can avoid future pitfalls and ensure that your new business entity is strong enough to protect you yet flexible to ensure that you grow, expand and prosper. We provide professional counsel and advice with diligence and a strong commitment to ensuring that you meet your goals.
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