November 12, 2012
Occasionally, I write for other business websites. Below is a preview of an article I wrote for CreateHype.
I frequently work with people in the initial stages of starting a new business. Choice of legal entity is one of the first and most-important decisions made at this point, so it is worth careful consideration.
Entrepreneurs commonly ask me if they should establish a Limited Liability Company (LLC). LLCs are a popular way of establishing a new business, but they are not the only or, often, the best choice.
What to Choose
Clients sometimes come to me thinking that forming an LLC is a must. While making your business an LLC is generally not a wrong idea, it’s not always the best idea.
Read the full article here.
Posted in Legal Entity, The Limited Liability Company | Tagged entrepreneur, guest post
August 2, 2012
S-Corps are corporations that elect to pass corporate income, losses, deductions, and credits through to their owners (“shareholders”) for federal tax purposes.
Articles of incorporation must be filed with the state to create your business entity. Then, corporations wishing to be taxed as S Corps must file Form 2553 with the IRS.
What is it?
S-Corps are corporations that elect to pass corporate income, losses, deductions, and credits through to their owners (“shareholders”) for federal tax purposes.
Note: The most common question I hear about S-Corporations concerns what the “S” stands for. There is a misconception that it stands for “small,” as many small business choose to set up as an S-Corp. Rather, S-Corps operate under Subchapter S of Chapter 1 of the Internal Revenue Code. By contrast, C-Corporations operate under Subchapter C of Chapter 1.
How do I do it?
Articles of incorporation must be filed with the state to create your business entity. Then, corporations wishing to be taxed as S Corps must file Form 2553 with the IRS.
Pros:
- The owner of an S-Corp could reduce his or her Self-Employment and Medicare Tax liability if work as an employee of the entity.
- A reasonable salary can be paid out of the S-Corp – reported to the shareholder/employee on a Form W-2.
- This amount is reported on the recipient’s Form 1040 for the year.
- The recipient owes Self-Employment and Medicare taxes on this amount
- Additional income to the S-Corp also passes through to the shareholders. This amount is calculated after salaries to employees are paid. This S-Corp income is reported to the shareholder on a Form K-1.
- This amount is also reported on the recipient’s Form 1040 for the year, but there is no Self-Employment or Medicare tax requirement for income from a Form K-1.
Cons:
- S-Corps can be more difficult to set up and maintain as they require the same governance as a “C” – corporation.
- Some states charge S-Corps an additional franchise tax, so check local laws prior to establishment.
Tax Considerations:
- S-Corps report annual income and loss on a Form 1120S (generally due March 15).
- S-Corps must complete Forms K-1 for all shareholders reporting their individual share of income and loss for the year.
- One copy of the Form K-1 is filed with the Form 1120S.
- The other copy of the K-1 is sent to the shareholder who will report his or her share of income and/or loss on his or her personal income tax return.
- While stock issuance is generally not an initial concern of small business owners looking to incorporate, legally, an S-Corp can have only one type of stock limited to not more than 100 shareholders.
- There are additional state limitations, so check carefully if you think stock will play a part in your company’s future.
- Incorporation is not free, so weigh the cost (both initial filing cost and cost of any required annual updates or filings) appropriately.
- The limited liability discussed above will not protect you from personal negligence. You are not shielded from your own misconduct by your incorporation.
Posted in Concerns for Business Owners, The S-Corporation | Tagged business, entrepreneur, small business |
June 21, 2012
The key reason most people look to “incorporate” their small business is to mitigate personal risk. The following business form will often protect your personal assets from liability.
What is it?
An LLC is a hybrid business structure that combines some of the features of a corporation (limited personal liability) and a partnership (“flow-through” taxation). One of their most popular features is that they provide the owners – or “members” – personal protection from business liabilities.
Note: An LLC is sometimes incorrectly called a “Limited Liability CORPORATION”. It is, legally, not a corporation. In many states, it is illegal to include the word “corporation” in the name of an LLC.
How do I do it?
LLCs are regulated by the state rather than the federal government, so it is imperative to review your specific state laws before formation. Your secretary of state should have information on his or her website. Formation generally involves filing certain paperwork designating the names of the members. This also usually involves a fee.
If you are starting an LLC with multiple members, be sure to have a membership agreement drawn up and signed by all parties to ensure management and executive decisions can proceed without issue.
Pros:
- Choice of tax structure. LLCs are the only enterprise formation that can be taxed as a sole proprietorship, a partnership, a C Corporation, or an S Corporation.
- Multiple member LLCs can choose to allocate specific items of income or loss to specific members, providing broader planning opportunities.
- Easier to maintain than a corporation (in terms of required annual disclosures and paperwork).
- Limited personal liability.
Cons:
- Depending on the state in which you form your LLC, you may be subject to specific LLC franchise taxes or fees.
- LLCs are not generally recognized abroad, so take this into consideration on initial set-up.
Tax Considerations:
- Generally, profits or losses flow through the business to the individual members and avoid the “double taxation” that corporations face.
- Profits or losses from single-member LLCs pass through to the individual owner and are reported on the Form 1040 Schedule C.
- The default rule for LLCs with multiple members is to treat them as partnerships for federal tax purposes.
- Income and loss must be reported annually on a Form 1065.
- The partnership reports distributions of income or loss to each partner on a Schedule K-1.
- The amounts from the Schedules K-1 are then reported on each individual partner’s income tax return.
- Any LLC, regardless of number of members, can elect to be taxed as a corporation by filing a Form 8832. After electing corporate tax status, an entity may select C or S corporation tax treatment.
- In some states, the LLC dissolves when all members have withdrawn, so plan for “termination” at the outset and pay close attention to your specific state laws.
- Owner of Single Member LLCs are well-advised to maintain separate bank accounts for personal and business use to avoid the appearance that the LLC was set up solely to avoid personal liability. There have been cases where LLC owners have been found personally liable if the LLC was seen as merely a screen.
Posted in Concerns for Business Owners, The Limited Liability Company | Tagged legal, Limited Liability, LLC, personal liability |
