Which would be the best for a service company with employees? I'm pretty sure most every business owner is a C corp. What would the benefit of S corp be? I know a few guys who operate as LLC. WHat are the benefits to that over a C corp?
A c-corp and an s-corp are the same with the exception of taxable income. The s-corp is a IRS designation. You register as a corporation to form it with your state, you designate with the IRS as a s-corp for taxation purposes. The two entities are identical as far as legalities and protection of personal assets, the difference is being that an s-corp is a flow through entity as far as taxes are concerened where as a c-corp is not. A c-corp gets double taxed as far as paying a corporate tax, where as a s-corp does not. All profits whether realized or not (Meaning whether you leave them in the bank or not) flow through to the share holders (usually you) and are taxed at your personal income tax level. By far the vast majority of small businesses that are coporations are s-corps. The only time you start realizing tax advantages are when you have multi-state offices and real share holders and are at a level where you are trading on the stock exchange. If you are making a crap load of money you could start taking advantage of c-corp tax saving stategies, but this is usually for the really big hitters, if you start making like $300,000 a year in profits then it is time to look at creating retirement plans and such and c-corp strategies.
The benefit of the LLC is less paperwork. You need to act like a corporation if you want the protections of it. This means holding meetings and having minutes, having a separate bank account, ect. If it can be proven that you don't opperate like a corporation when you get sued the corporate veil can be pierced and your personal assets can be attached. Don't think that it is difficult to conduct business legally as a corporation. A annual shareholders meeting can be a simple as sitting down at the kitchen table once a year and asking yourself if you are present. Make a paper document and include it in the corporate minutes that a meeting took place and nothing changed. That is it. Documented, done.
An LLC is a little cheaper and a little easier to run. There are some issues that could come into play if you have multiple entities in which certain entities can't own others, and there are specific tax consequences depending on your business model that an accountant will help you decide if an LLC might be beneficial. For 95% of us it will be a toss up between the two.
Grumpy, I am an S-corp. How I got there I don't know and don't care, I have too many other things to worry about. Take your attorney, accountant and bookkeeper, throw them in a room and let them thrash it out. That's THEIR job and if they're smart they'll do what's best for you or it's one less paycheck for them.
Teetor I understand your logic. The lawyer and accountant are the pros. I did the same thing basically, I took my accountant's advice... I however am the kind of person that likes to know how and why I do things not just because someone told me to.
I have Kiplinger's Small Business Attorney.
This is what they have to say.
My accountant advised me to incorporate and it has worked out for me. Hope this helps.
Limited Liability Companies
Every state has enacted laws permitting the formation of a limited liability company ("LLC") as an alternative to traditional corporations, general partnerships and limited partnerships. LLCs have become popular
because they offer the flexibility in management and other matters like a general partnership, while providing the benefit of limited liability for the investing members, like a corporation.
Unlike limited partnerships, LLC's protect all of the owners and all of them may participate in management. Unlike S corporations, LLC's do not restrict the number or type of owners. For these reasons, the LLC is
sometimes preferred to these other popular entities used by small businesses.
Limited liability companies are formed and established much like a corporation. The founders must prepare and file the proper documents with the state, according to the state's limited liability company law.
These laws normally provide that the LLC may have powers like a corporation. However some states restrict LLCs from certain activities, such as banking, insurance and professional services. LLC's have
members, similar to a corporation's shareholders. These members must have a written agreement, much like a partnership agreement.
Unfortunately, the average cost to establish an LLC is much higher than the cost of simple incorporation. LLC documents are not standardized, and it is important to have a qualified attorney help establish an
LLC. While the cost to set up a corporation can be as little as $100 plus filing fees, an LLC usually costs a minimum of $1500 plus filing fees, and is often much higher.
The IRS has determined that an LLC meeting certain requirements may be taxed as a "pass through" entity like a partnership or S corporation. This means that the LLC's profits and losses flow through to the LLC
members. Many of the restrictions placed on S corporations, such as limits as to the number of shareholders, do not exist for an LLC.
LLCs also differ from regular corporations in other ways. LLC laws do not permit the LLC to have unlimited life. Most laws prohibit LLC's to a life not to exceed thirty years. Also, LLC members are subject to
different rules with respect to transferring their membership interests, and withdrawing and distributing profits, as compared to a regular corporation's shareholders. One of the drawbacks to LLC's is the
uncertainty of doing business outside the state when the LLC is formed. Because not all states have identical LLC laws, you may have difficulty qualifying your LLC in a "foreign" state. If not properly qualified, that
state law may permit claimants to "pierce the corporate veil", thereby making individual members liable for LLC debts. This loss of limited liability protection poses a substantial risk.
Consult with your attorney to determine if an LLC may be appropriate for a given business enterprise.
For related information see:
An "S corporation" is a closely held corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code, instead of the rules of Subchapter C that generally govern taxation of corporations.
S corporation election does not modify any of the laws and rules concerning liabilities or legal obligations of corporate directors, officers or shareholders. Other than the way in which S corporations and their
shareholders are taxed, S corporations are subject to all of the issues and obligations, and have all the benefits and rights of, any other corporation.
Avoid Double Taxation
A corporation is considered to be a tax paying entity separate from its shareholders. Most corporations are taxed as C corporations. A C corporation must file returns and pay taxes on its income. When the
corporation distributes some of its income to shareholders as dividends, the shareholders must pay income tax on the dividends. The income the shareholders receive is therefore taxed twice, once at the
corporate level when the corporation receives it, and again at the shareholder level when the shareholders receive it. This "double taxation" is one of the drawbacks to C corporation status.
On the other hand, S corporations are treated differently. They avoid "double taxation." If an eligible corporation and its shareholders elect to be taxed as an S corporation, the corporation is treated as "pass
through" entity (very much like a partnership). All corporate income is "passed through" to the shareholders. The S corporation does not pay a corporate income tax. The income is taxed only at the shareholder
level. Likewise, all losses, deductions and credits are passed through to the shareholders and must be included on the shareholders' tax returns in the same form that those items are received, paid or incurred
by the corporation.
Qualifying as an S Corporation
To qualify as an S corporation, the corporation must be a "small business corporation" as defined in the Internal Revenue Code. To qualify as a small business corporation, there may be no more than 35
shareholders, there may be only one class of stock, and the corporation and the shareholders must properly and timely file an election with the Internal Revenue Service and meet other requirements.
While the benefits of S corporation status are in many cases significant, to receive those benefits the corporation and the shareholders must comply with the Internal Revenue Code and related regulations, and
keep and maintain appropriate books and records. Also, S corporation status may be beneficial to some shareholders but not all. Before making an S corporation election, consult with an attorney or
accountant well versed in the S corporation requirements and benefits. Other business forms, in particular a limited partnership or a limited liability company, may provide comparable tax benefits without some
of the disadvantages of a limited liability company.
Almost forgot.I used the form that is in Kiplinger's and sent it in to the state with the necessary filing fees and thats all it took for me. Cost about 100.00 to file. Kiplinger's cost about 30.00 I think.
Grumpy, I believe that you stated that you are 26.
At that age I was working as a civil engineer and just looking forward to my first PHD plus becoming financially responsible enough to marry my pre- high school sweetheart.
At that time I knew that I could not do it all and today is worse, I think that the next cellphone that I buy ought to come with a half day tutorial. Lightning whacked my fax machine Wed. night, I don't mind buying a new one but learning to use it will take some time and, as we all know, that is money.
What I am trying to say is that as a businessman you need to concentrate on your primary skills, they are what got you to where you are. For me, the toughest part was releasing the books after all I did whatever was required to keep alive at times as most small businesses do. Sometimes it wasn't pretty to an accountant, crossed accounts, cash transactions, not a happy lady. We eventually managed to get everything squared away and have been on an even keel ever since.
The bottom line is that you are never going to know it all and if you are in business, you are going to have to trust other people and you will get shafted once in a while. This is just the nature of the beast, it's why we make the big bucks. You just have to minimize the shaftings.
Teetor the point I was trying to make was not indepth and complex. If the accountant says I should be S corp. I will say "Why?". He will say "It will prevent double taxation." and then I will say "That's good let's do it!".
I wouldn't ask how it lowers my taxes. I might ask if there are any negative trade offs but overall if he shows me the benifit in non technical terms, then I am sold on his idea. 1 minute of conversation and I am a much smarter person.
Gotcha, Grumpy. I didn't have the time. When I was incorporating the state decided to attempt to change the workers comp laws AND the county decided to restructure contractor licensing.
I had to scramble to make sure that I had all of the proper licenses and that my ins. reflected the changes while attending meetings and seminars on WC. I just told them that what was best for me would be best for them and call me when it's time to sign papers.
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