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What Structure of Business is right for you? Part 3: S-Corporations and LLC

Writer's picture: Alysa S. EspinosaAlysa S. Espinosa


Consult with a Business Professional to determine whats best for your situation.

We will wrap up this series with a discussion of the S-Corporations and the Limited Liability Corporation.


S-Corporations


S-Corporations are ideal for the entrepreneur because they afford the limited liability of corporations and they avoid double taxation by taxing straight through to the shareholders. Since this tax structure avoids double taxation it is perfect for a young business because typically the first few years of operation are prone to loss rather that profit gain due to investment in capital such as equipment and vehicles. These expenses can then be used to offset personal income taxes.


Liability


The liability is limited to the business itself and not the personal assets of the shareholders. As in a corporation personal liability is limited to the investment of the shareholder.


Income Taxes


The corporation is not taxed as a separate entity; rather the individual shareholders are taxed based of their proportionate share of earnings. Some states levy a corporate tax, and the losses of the corporation can be deducted from shareholder earnings.


Control


Management is controlled by the individual shareholders who elect officers as with a corporation.


Profit Retention


Unlike a corporation that retains profits as a separate entity, the S-corporation passes the profits and losses through to the shareholders.


Location


A S-Corporation will register in a selected state of incorporation. If the S-Corporation chooses to operate in other states it will be viewed as a foreign corporation and must foreign qualify to operate in that state.


Convenience or Burden


S-Corporations present a challenge in the formation process as particular requirements must be met. All shareholders must agree to be a S-Corporation. There is a limit of 75

Shareholders allowed, and all shareholders must be actual individuals and cannot be corporations or other partnerships.


Limited Liability Companies (LLC)


This type of business is a hybrid of the partnership and the corporation. It shares the limited liability of the corporation yet like a partnership individuals pay tax on profit from the business rather than the business paying tax itself. LLC’s are not as formal as corporation in that they do not require annual shareholder meetings or articles of incorporation. A LLC is not a corporation. Unlike the S-Corporation there is no restriction on foreign ownership, shareholder ownership by corporations or non-residents. The amount of shareholders is unlimited as are the classes of stock.


Liability


Members of a LLC are not liable for debts or legal action against the company. Exposure is limited only to the investment of individual shareholders.


Income taxes


Income from the company is passed through to the individual shareholder who must then report the income on their personal tax returns. Company losses may be adjusted against shareholder income to defer tax liability.


Longevity or continuation of the business


Generally speaking the business can operate perpetually even if a member withdraws, dies or quits. If a member decides to withdraw from the business he is usually paid the value of his share in the business. The transfer of shares or interest in the business may be given freely by the shareholder to anyone they choose, unless the operating agreement stipulates otherwise. If the operating agreement is silent on the issue, a unanimous vote by the remaining members will decide the matter (Beatty,Samuelson, 2007, p 767).


Control


LLC’s are not required to have a board of directors, but are usually managed by the owners who own a portion of company stock.


Convenience or Burden


LLC’s are more difficult to form than a sole proprietorship or partnership. Two forms are required: a charter and an operating agreement. The operating agreement should be detailed and exact to avoid conflicts. Seeking legal counsel is especially advised when forming a LLC.



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