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About Corporations

“ Anyone in business, going into business, or anyone with valuable assets or working to acquire valuable assets, should consider forming a Corporation or Limited Liability Company . ”

Forming a Corporation establishes a protective barrier between your business assets and your personal assets. In many cases, business owners will use different entities for different parts of their business to receive a reduced tax rate and greater liability protection.

What is a C Corporation?

C Corporations are powerful business tools when used correctly. They provide the liability protection that all small business owners should be taking advantage of. 

A Corporation is a separate legal entity that is regulated by state law and can be formed in its home state or in any other state. The Corporation is regulated by the state it which it was formed. This can be very beneficial if you form your company in a preferred state like Nevada or Wyoming.

Ownership: A Corporation is owned by its shareholders. Shareholders can be individuals or other entities such as another Corporation, trust or a limited liability company. Although a Corporation usually has more than one owner, it is possible for only one individual to create and own 100 percent of the Corporation.

Tax: Corporations must file their own tax return. In most cases, the corporate level of tax is less than the individual rate.  

Asset Protection: The owners or shareholders of a Corporation cannot be held personally liable for the actions of the business except in the case of outright fraud. If the Corporation is properly established and maintained, the individual shareholders are not personally liable for the losses of the business and creditors may only look to the Corporation and the business assets for payment.

Quick Benefits List:

  • Privacy
  • Asset Protection
  • Tax Savings
  • Fringe Benefits
  • Credibility
  • Easier Transfer of Ownership
  • Centralized Management

Disadvantages: Corporations are legally required to observe corporate formalities. Corporate formalities consist of the holding and documentation of all company meetings, the formal approval of major corporate decisions and the approval of the board of directors and shareholders. Failure to meet these requirements will lead to the disallowance of tax deductions and the asset protection that the Corporation provides. With the Complete Paperwork Assistance program you can enjoy all the benefits a Corporation provides, without the hassles and headaches of doing all the paperwork yourself.

Uses:

  • To raise capital
  • Business operation

Choosing the Right Business Entity

To fully grasp the advantages of incorporating, you should understand what other types of business entities are available. In choosing the right business entity, you should ask yourself a few questions; how easy is the structure to set-up, who controls the structure, what are the levels of liability and what are the tax consequences? Business entities to consider would include:

Sole Proprietorships

A sole proprietorship is the simplest yet riskiest form of doing business. In most cases, you simply acquire a business license and you are in business.

Ownership: You personally own and operate the business.

Tax: One-level of tax. Sole proprietors are also subject to a 15.3% self-employment tax on all income earned from the business.

Asset Protection: As far as level of risk is concerned, this is the worst form of running a business. You are completely responsible for all debt and liability associated with the business.

Quick Benefits List: Simple and easy to establish.

Disadvantage: As a sole proprietorship, you and the business are one in the same, which means if your business gets sued, your personal assets are at risk. If you get sued, your business assets are at risk.

Uses: Never recommended because the risks are too high.

Partnerships

A Partnership is a form of business often used when two or more people get together to conduct a business enterprise. From that point on, the gain or loss of the Partnership is passed through to the individual partners and is included on their individual tax returns.

Ownership: As the name implies, a Partnership is owned by the Partners.

Tax: Partnerships are taxed as pass through entities which means the profits or losses flow through to the owners.

Asset Protection: Partnerships are never recommended. In a Partnership all parties are liable for the company's actions and personal assets can be attacked to satisfy a judgment. It is just as easy to set up a formal entity such as a General Partnership, Corporation or a Limited Liability Company, rather than risk everything you own in a Partnership.

Disadvantage: A Partnership provides no liability protection to the partners. If, for example, Joe and Don get together and form a business partnership, and the partnership or Don gets sued and loses, then assets of both Joe and Don are on the line. This disadvantage alone is enough to compel those considering a Partnership to run the other way. Business entities such as the Limited Liability Company or a Corporation would better serve 100% of the people looking to form a Partnership.

Uses: Never!

Limited Partnerships/Family Limited Partnership

A Limited Partnership is taxed like a partnership, yet it has many of the liability protection aspects of a Corporation. There are two types of partners in a limited partnership: the limited partners who invest in the partnership but have no control, and the general partner (or partners), who controls the partnership.

Ownership: A limited partner is controlled by the “general” partner and the limited partners own a % of interest. The “general” partner takes the lead role in the organization and as such, is liable for the actions of the company. The limited partners do not take an active role in running the business, therefore they are not liable for the actions of the company.

Tax: A Limited Partnership is taxed as a pass-through entity which means the profits or losses flow through to the owners.

Asset Protection: The asset protection of a limited partnership is held by a “charging order”.  This means if a limited partnership is sued, a judge can issue a charging order allowing the plaintiff rights to the partnership interest. In other words, the creditor only gets what the general partner decided to distribute, which is often nothing. This makes the limited partnership a very powerful asset protection tool when utilized with other business structures.
 
Quick Benefits List:

  • Privacy
  • Asset Protection
  • Estate Planning

Disadvantages: The problem with a Limited Partnership is that the general partner has personal liability for certain lawsuits filed by the limited partners against him or in a lawsuit filed against the partnership itself.

Uses:   

  • Hold Real Estate
  • Estate Planning
  • Hold The Stock of an Operating Company

Limited Liability Companies - LLCs

A Limited Liability Company (LLC) is a hybrid between a Corporation and a Partnership. An LLC provides the liability protection of a Corporation with the pass-through taxation of a Partnership. Limited Liability Companies are becoming popular due to their flexibility in management and the personal liability protection offered to its members.

While LLCs don’t provide many of the same fringe benefits as a Corporation, the flexibility and simplicity of ownership make it the ideal tool for a small company looking for liability protection.

The owners of an LLC are called members and they work in a similar capacity as the shareholders of a Corporation. The members buy interest in the LLC with cash, property or the promise of payment.

LLCs have far fewer restrictions on membership than an S-Corporation has on shareholders. LLCs also allow members to participate in management of the LLC without losing their protection from liability, whereas a limited partner in a limited partnership does not have this benefit.

Corporations can even be a member or manager of an LLC.  This allows greater flexibility than an S-Corporation which places restrictions on the number of shareholders and who can be a shareholder. 

Ownership: LLCs are owned by the Members, similar in scope to shareholders in a Corporation. LLCs can be managed by its members, they may choose to have a professional manager or they can make one of the members a manager. When you form an LLC you will be asked if you want to be “member managed” or “manager managed”.  Members can be individuals or other entities, such as a Corporation.

Tax:  An LLC can be structured to be taxed as either a "pass-through" entity or as an association that pays its own taxes.

Asset Protection:  Members of an LLC have the same liability protection as shareholders of a Corporation.

Quick Benefits List:

  • Asset Protection
  • Tax Savings
  • Flexibility of Management

Disadvantage: The main disadvantage of LLCs is their use is relatively new in the United States so there is no uniformity in the laws that govern them between individual states.

Uses:

  • Holding Real Estate
  • Trading Accounts
  • Operating Business

 

S-Corporations

All Corporations start out as a regular Corporation. By filing form 2553 with the IRS you are electing to meet the requirements for an S-Corporation.

Essentially, an S-Corporation is treated like a partnership for tax purposes, but it has all the limited liability protection of a regular Corporation. S-Corporations, however, do not have many of the fringe benefits that regular Corporations do.

Tax: An S-Corporation is a pass-through entity. This means profits and losses pass through to the shareholders.

Asset Protection: An S-Corporation provides the same liability protection as a regular C-Corporation.

Quick Benefits List:

  • Tax Savings
  • Asset Protection

Disadvantages: There are certain restrictions that must be met to qualify as an S-Corporation:

  • 100 or fewer shareholders
  • You can only issue one class of stock
  • Shareholders must be U.S. Citizens or U.S. residents, estates, certain trusts, banks and certain exempt organizations, not C Corporations
  • If you are a greater than 2% shareholder of an S corporation, certain benefits available to you may be limited.

You may want to consider the benefits of an LLC vs. an S-Corporation.

 

All that we do is submitted and performed with the understanding that we are not engaged in rendering legal, accounting or other such professional service.  If legal advice or other expert assistance is required, the services of a professional should be sought.