ETD: 890 SPECIAL REPORT - To be or not to be: A Corporation or LLC
E-Tailer's Digest
etd_post at gapent.com
Thu May 26 10:58:56 GMT 2005
E-Tailer's Digest --- Everything for the Retailer
Issue #0890 May 26, 2005
George Matyjewicz, Moderator mailto:georgem at gapent.com
Published by: GAP Enterprises, Ltd. http://www.etailersdigest.com
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CONTENTS
[1] Greetings
[2] SPECIAL REPORT - To be or not to be: A Corporation or LLC
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[1] Greetings.
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Hi All:
We frequently get questions about what type of business is best. The
answer is there is no one type that works for everybody. It all depends on
what you want to accomplish. If you are concerned about liability of the
business on you personally, and you want to protect your personal assets, a
corporation will be best. However, if you offer personal services, e.g., a
CPA firm, you may not be able to exonerate yourself from personal liability.
Each entity has its advantages and disadvantages. A corporation does
provide protection, however it does require more paperwork, more rules and
double taxation. A simpler alternative may be a Limited Liability Company
(LLC) which has the benefits of a corporation and the ease of filing as an
individual.
In this special report we will look at an LLC vs a Corporation ("C" or "S"
corporation). Hopefully you can decide what works best for you. It is
relatively easy to form a corporation or LLC. We have formed many of them
over the years, and always used the same method - via snail mail in the
"old days" and online today
(<http://www.mycorporation.com/affiliate.asp?resellid=11624584>click here
for details). You can incorporate in any state, even if you are not a
resident. And you can obtain a wealth of information at the site.
Now, let's get to everything for the retailer.
Sincerely
George Matyjewicz, PhD
Chief Global Strategist, GAP Enterprises, Ltd.
mailto:georgem at gapent.com
http://www.etailersdigest.com
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[2] To be or not to be: A Corporation or LLC
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A compilation of information by...
George Matyjewicz, PhD
Chief Global Strategist, GAP Enterprises, Ltd.
http://www.gapent.com/ http://interimhelp.com
There are different types of business entities:
Sole Proprietorship - business is operated by a single person. The owner
is not considered an employee, but is, in fact, a self-employed
individual. The simplest form of business – an individual can start up a
sole proprietorship with no legal formalities. Inexpensive.
General Partnership - defined as a voluntary contract between two or more
competent persons to place any part of their money, effects, labor, and
skill in lawful commerce or business with the understanding there shall be
proportional sharing of profits and losses between them.
Limited Partnership - A partnership that is made up of one or more general
partners and one or more limited partners. The big difference between a
general partner and a limited partner is that the limited partner is not
personally liable for debts of the partnership.
Regular corporation (C Corporation) - A separate legal entity once it is
formed, so it must file its own taxes and be responsible for its dealings.
It can have unlimited numbers of shareholders, and those shareholders can
be any kind of legal entity. Additionally, since corporations are taxed on
their income and shareholders have to claim dividends as taxable income
themselves, shareholders of a "C" corporation are double taxed on their
dividend income.
S Corporation - The same limited liability of a corporate
shareholder. However, business owners must pay income taxes in the same
manner as a sole proprietor or a partner.
Professional Corporation - Certain occupations, e.g., physicians,
attorneys, ad accountants, may incorporate their practice through a
professional corporation only. However, some professionals in some states
may incorporate as a professional corporation or as a regular corporation.
Limited Liability Company (L.L.C.) - The limited liability company is not a
partnership or a corporation but rather is a distinct type of entity
created by statute. Rules governing the L.L.C. are usually distinct from
the rules and laws governing corporations. In general, however, the L.L.C.
is a state-created entity intended to provide its members/owners with the
limited liability afforded to corporate shareholders while minimizing many
of the formalities corporations are required to observe.
Limited Liability Partnership (L.L.P.) - often used by professional
associations. The partner or investor's liability is limited to the amount
he/she has invested in the company.
Let's look at corporations and L.L.C.s.
L.L.C.s and Corporations are two distinct types of business entities. There
are benefits to each of these entities. To make an educated decision as to
which type of entity to form, it is important to understand each type of
entity and the benefits associated with each. Forming an LLC or Corporation
(S Corporation or C Corporation) requires that you follow strict
formalities. These formalities vary depending upon the type of entity you
choose.
THE LIMITED LIABILITY COMPANY (L.L.C.):
A Limited Liability Company has the advantage of being a hybrid between a
partnership and a Corporation. The advantage of a Limited Liability Company
is that most states require fewer formalities be observed in an LLC in
comparison to a corporation.
Advantage: One LLC Member Required. Historically, most states require that
a Limited Liability Company be comprised of at least two LLC members. Today
most states and the IRS recognize the single-member LLC as a legitimate
business structure.
Separate Legal Entity Like limited partnerships and corporations, the
Limited Liability Company shares a similar advantage -- it is recognized as
a separate legal entity from its "members."
Limited Liability Ordinarily, only the LLC is responsible for the company's
debts thus shielding the members from individual liability. However, there
are some exceptions where individual members may be held liable, i.e.,
personal guarantees.
LLC Management and Control Management and control of an LLC is vested with
its members unless the Limited Liability Company's articles of organization
provide otherwise.
Voting Interest Ordinarily, voting interest in an LLC directly corresponds
to interest in profits, unless the articles of organization or operating
agreement provide otherwise
Transferability No one can become a member of an LLC (either by transfer of
an existing membership or the issuance of a new one) without the consent of
members having a majority in interest (excluding the person acquiring the
membership interest) unless the articles of organization provide otherwise.
Duration An LLC does not have a reliable continuity of existence. The
articles of organization must specify the date on which the Limited
Liability Company's existence will terminate. Unless otherwise provided in
the articles of organization or a written operating agreement, an LLC is
dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy
of a member (unless within 90 days a majority in both the profits and
capital interests vote to continue the LLC)
Advantage: Formalities. The existence of an LLC begins upon the filing of
the Articles of Organization with the Secretary of State. The articles must
be on the form prescribed by the Secretary of State. Among the required
information on the form is the latest date at which the LLC is to dissolve
and a statement as to whether the LLC will be managed by one manager, more
than one manager, or the members.
To validly complete the formation of the LLC, members must enter into an
Operating Agreement. This Operating Agreement may come into existence
either before or after the filing of the Articles of Organization and may
be either oral or in writing.
If you are considering forming an L.L.C., you should be aware of the
following facts:
IRS Treatment of the Two-Member LLC. An L.L.C. has "members," which may be
either individuals, partnerships, corporations, trusts, or any other legal
or commercial entity. Generally, the liability of the members is limited to
their investment and they may enjoy the pass-through tax treatment afforded
to partners in a partnership. If your LLC has two or more owners, The IRS
will tax the LLC owners as if the owners were members of a partnership. A
partnership files Form 1065 (U.S. Partnership Return of Income).
IRS Treatment of the One-Member LLC. An LLC with only one member/owner is
taxed by the IRS as a sole proprietorship is taxed. Thus, the sole member
of an LLC will file (Form 1040), (U.S. Individual Income Tax Return) and
will include (Form 1040, SCHEDULE C) (Profit or Loss from Business) with
his/her tax returns.
"Tax My LLC as a Corporation!" Regardless of how many members the LLC has,
the LLC may file an Election to be Treated as a Corporation for Purposes of
Taxation (IRS Form 8832). If an election is made to be treated as a
corporation, the LLC must file Form 1120 (U.S. Corporation Income Tax
Return). IRS Form 1120, Form 1120 Instructions
THE CORPORATION:
Separate Legal Entity Status. A corporation is a separate legal entity
existing under authority granted by state law. It has its own identity
separate and apart from its shareholders/owners.
As a separate legal entity, a corporation has the power to act in any way
permitted by law and by its own corporate charter. For example, a
corporation can enter into contracts, buy and sell both real and personal
property, sue and be sued, and can even be responsible for breaking the law
(i.e. committing a crime).
In most jurisdictions, any officer or director or employee can appear in
small claims court on behalf of the corporation.
As a separate legal entity, a corporation is responsible for its own debts.
Normally, shareholders, directors, and officers are not responsible for
corporate liabilities. If the corporation suffers losses, the corporation
itself must bear those losses to the extent of its own resources, and not
the personal assets of the individual shareholders. In effect, however,
shareholders indirectly bear these losses by a decline in the value of the
stock they hold in the corporation.
Note however, that shareholders, directors, and/or officers may be held
liable for the debts of the corporation where the court imposes "alter-ego
liability" or where the individual has personally guaranteed the corporate
debt.
A corporation is capable of continuing indefinitely. Its existence is not
affected by the death or incapacity of shareholders, directors, or officers
of the corporation.
Duration of Corporation Compared to LLC. An LLC has a limited existence.
Absent a contrary agreement, a limited liability company (LLC) is dissolved
upon the death, withdrawal, or bankruptcy of a member unless the business
is continued by unanimous vote of the remaining members. Although the
operating agreement can be drafted to avoid such a result, the life of the
LLC is still limited to the termination date in the Articles of Organization.
The DISADVANTAGES of INCORPORATING
Corporate Formalities. A corporation can be created only by compliance with
General Corporation Law of the state of incorporation. This usually
requires filing of Articles of Incorporation with the appropriate state
entity (usually the Secretary of State) and payment of the requisite state
fees and taxes.
A corporation is required to have a board of directors, corporate officers,
annual shareholders meetings, and to maintain separate books and records.
Failure to observe such formalities may result in the personal liability of
shareholders for corporate debts. However, where the corporation has only
one shareholder, many states allow that one shareholder to act as director
and all officers (President, Secretary, and Treasurer).
LEGAL and TAX ISSUES:
Separate Legal and Tax Life. A corporation which is properly formed and
operated as a corporation assumes a separate legal and tax life distinct
from its shareholders. A corporation pays taxes at its own corporate income
tax rates and files its own corporate tax forms each year IRS Form 1120.
One Person Required. In most states, one or more persons may form and
operate a corporation. Some states, however, require that the number of
persons required to manage a corporation be at least equal to the number of
owners. For example, if there are only two shareholders, there must also be
a minimum of two directors serving on the board.
Fringe Benefits. Corporations may often offer their employees unique fringe
benefits. For example, owner-employees may often deduct health insurance
premiums paid by the corporation from corporate income. In addition,
Corporate-defined benefit plans often afford better retirement options and
benefits than those offered by non-corporate plans.
Corporate Formalities. To retain the corporate existence and thus the
benefits of limited liability and special tax treatment, those who run the
corporation must observe corporate formalities. Thus, even a one-person
corporation must wear different hats depending on the occasion.
Avoiding Double Taxation. Generally, the corporation is taxed for its own
profits; then, any profits paid out in the form of dividends are taxed
again to the recipient as dividend income and the individual shareholder's
tax rate.
However, most small corporations rarely pay dividends. Rather,
owner-employees are paid salaries and fringe benefits that are deductible
to the corporation. The result is that only the employee-owners end up
paying any income taxes on this business income and double taxation rarely
occurs.
The S-Corporation:
An S Corporation begins its existence as a "C-Corporation" (discussed
above) -- (i.e. as a general, for-profit corporation upon filing the
Articles of Incorporation with the appropriate STATE office. However, after
the corporation has been formed, it may elect "S Corporation Status" by
submitting IRS form 2553 to the Internal Revenue Service (in some cases a
state filing is required as well).
Once this filing is complete, the corporation is taxed like a partnership
or sole proprietorship rather than as a separate entity. Thus, the income
is "passed-through" to the shareholders for purposes of computing tax
liability. Therefore, a shareholder's individual tax returns will report
the income or loss generated by an S corporation.
Qualifying for S Corporation Status. To qualify as an S corporation, a
corporation must timely file IRS Form 2553 with the IRS. This election must
be made by March 15 of the current year if the corporation is a
calendar-year taxpayer in order for the election to take effect for the
current tax year.
To qualify for S corporation status, the corporation must:
Be filed in one of the 50 United States.
Maintain only one class of stock.
Maintain a maximum of 75 shareholders.
Be comprised SOLELY of shareholders who are individuals, estates or certain
qualified trusts, who consent in writing to the S corporation election.
NOT have a shareholder who is a non-resident alien.
Losing S-Corporation Status. Failure to observe ANY of the above
requirements could revoke S-Corporation status at any time. An
S-Corporation that loses its status as such may not re-elect S-Corporation
status for a minimum of five years.
Corporate Formalities. An S-Corporation follows the same state formalities
as does a C-corporation (i.e. filing Articles of Incorporation and paying
state fees).
IRS Filings. The S-Corporation must complete and file IRS Form 1120s to
report its annual income to the IRS each year.
Who Should Elect S-Corporation Status? Owners who want the limited
liability of a corporation and the "pass-through" tax-treatment of a
partnership will often make the S-Corporation election. In most cases,
corporations that would benefit from S-Corporation status are those who
plan on distributing the majority of earnings to its shareholders in the
year those earnings are realized.
Corporations who plan on retaining earnings for future investments in
future tax years often choose the C-Corporation because, under the
S-Corporation, earnings will be taxed as if they were distributed to
shareholders regardless of whether a distribution actually occurred or
whether the corporation retained the earnings for future investment.
If you want to incorporate,
<http://www.mycorporation.com/affiliate.asp?resellid=11624584>click here
for more information.
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