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.

    • Related Articles

    • What Kind of Tax Return Does One File with LLC, Corporation or Trust

      IF IT IS PERSONAL: A Form 1040 is used to report any personal income (consult a CPA to learn which form is right for the situation). One may not need to file for their person if they did any of the following: Redeemed in lawful money all year As an ...

    • Foreign LLC vs Domestic LLC

      Foreign qualification is when a legal entity conducts business in a state or jurisdiction other than the one it was originally formed within; often used for entities previously registered in another state and wishing to conduct business within a new ...

    • Can LLC or Corporation Be A Grantor for A Trust

      A Corporation and LLC can be grantor for a statutory trust, but not a private express trust (i.e. Bulletproof Trust). Private express trusts require a living human being to be grantor. If the goal of using these statutory entities as grantor is to ...

    • Can One Use A Shelf Corporation / Shelf LLC for Corporate Credit

      Shelf entities are not recommended. They may show a higher "years in business" but that date resets when it is found the company is under new management. Additionally, the bank account registration date is the official date for some vendors/lenders ...

    • Can LLC or Corporation Be A Trustee

      Yes, but this may expose a private trust to additional reporting with such a public entity.