Which Corporate Entity Is Right for The Situation?

Which Corporate Entity Is Right for The Situation?

The following is a brief explanation of considerations to be made in the forming of an LLC, S-Corp or C-Corp.

LLC
*Suggested for business owners making under $100k annually
*It can be thought of as a combination between a partnership and a corporation.
*The LLC provides protection from personal liability against any of the LLC’s financial debts or legal liabilities.
*It is regulated under state law and all states allow businesses to form as an LLC. Under state law, the LLC is a separate, distinct legal entity from its owners.
*LLC provides flexibility in forming and maintaining a business.
*The costs to establish vary from state to state, but are minimal.

C-Corp
*Suggested for business owners exceeding $100k annually
*Provides its owners or shareholders with personal liability protection. The shareholders’ personal assets are unreachable by the corporation’s creditors.
*C-Corps are very attractive to outside investors.
*C-Corps are not considered “pass-through” entities; the corporation’s income is taxed at the corporate level.
*If any dividends are distributed, then the shareholders pay taxes at the individual level.
*The corporation’s income is subject to double taxation, once at the corporate level and once at the personal level.
*Fairly expensive to form and maintain
*More formal paperwork requirements to abide by
*Less flexibility and more formal business requirements

S-Corp
*Considered a “pass-through” entity, similar to an LLC
*S-Corp is not subject to double taxation. The corporation’s income passes through to individual owners who then pay taxes on their personal tax returns.
*Profits are NOT subject to self-employment taxes, but the shareholders must be paid a “reasonable salary.”
*Shareholders are considered employees of the S-Corp, so any salary received is subject to self-employment taxes such as Medicare and Social Security.
*S-Corp cannot have more than 100 shareholders that must be U.S. Citizens or resident aliens.
*Provides shareholders with personal liability protection
*For business owners who want the benefit of a corporation without being subjected to double taxation.
*For business owners who want the flexibility to set “reasonable salary” of shareholders/owners
*For business owners who want more flexibility with accounting methods.

State requirements vary, but most require the following in order to form:
1. File Articles of Organization;
2. Create an Operating Agreement;
3. Create a Board of Directors;
4. Appoint Officers;
5. Issue Stock; and
6. Appoint a Registered Agent.
As always, we cannot provide specific advice and legal counsel or a CPA should be sought if one has further questions.

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