It is of course possible to change the structure of a business if the nature of the business changes to require it, but this can often result in a tax penalty of one kind or another. Therefore, it is better if the business owner can determine the most suitable business entity when setting up the business. You need professional legal advice to make this decision, but the first step is to learn what the different structures are, depending on your situation, long-term goals, and preferences. For LLCs, business operations are much easier than other business structures and the requirements are minimal. Although LLCs are required to follow the same guidelines as S companies, they are not required by law to do so. Some of these policies include the adoption of by-laws and the holding of annual meetings. There are significant legal differences in terms of formal operational requirements, with S companies being much more rigidly structured. Among the many internal formalities required for S companies are strict regulations for the adoption of the company`s articles of association, the holding of initial and annual general meetings, the holding and keeping of minutes of company meetings, and extensive regulations related to the issuance of shares. Liability: LLC members are protected from personal liability for debts and business claims, a feature known as “limited liability.” If a limited liability company owes money or faces a lawsuit, only the assets of the company itself are threatened. Creditors cannot access the personal property of LLC members except in cases of fraud or illegality. LLC members should exercise caution so as not to “break the corporate veil,” which would expose members to personal liability. For example, LLC owners should not use a personal checking account for business purposes and should always use the LLC trade name (rather than the owner`s individual names) when working with clients. If you want exclusive or primary control over the company and its operations, a sole proprietorship or LLC might be the best choice for you.
You can also negotiate such control in a partnership agreement. The IRS is more restrictive on the ownership of S-companies. These companies cannot have more than 100 shareholders or principal owners. S-companies cannot be owned by persons who are not U.S. citizens or permanent residents. In addition, the S Corporation cannot be owned by any other entity. This restriction includes ownership of other S entities, C Companies, LLCs, business partnerships, or sole proprietorships. An LLC can be used for a business of any size, such as a doctor`s or dentist`s office, or as a legal entity that owns industrial property.
An LLC can also be formed by family members who do business in states that allow LLCs. Before forming an LLC, business owners should consider the different characteristics associated with the formation of an LLC, including the following. It depends on how the company is incorporated for tax purposes and the amount of profit generated. An LLC and an S Corp can be taxed at the income tax level. LLCs are often taxed at personal rates, but some LLC owners choose to be taxed as a separate entity with its own federal identification number. Owners of S companies must receive a salary in which they pay Social Security and Medicare taxes. However, dividend income or part of the remaining profits (after the payment of the owner`s salary) can be passed on to the owner, but not as an employee, meaning that he does not pay social security and health insurance taxes on these funds. Limited liability companies are taxed differently from other companies.
An LLC allows for pass-through taxation, where business income or losses flow through the business and are instead recorded on the owner`s personal tax return. As a result, profits are taxed at the owner`s personal tax rate. A single-member LLC is generally taxed as a sole proprietorship. Any gains, losses or deductions that are business expenses that reduce taxable income will all be reported on the owner`s personal tax return. A multi-owner LLC would be taxed as a partnership, meaning that each owner would report profits and losses on their personal tax return. The sole proprietorship is one of the most common legal structures for small businesses. Many popular businesses started as sole proprietorships and eventually grew into multi-million dollar businesses. Some examples: Taxation: An LLC is considered a “flow-through entity” for tax purposes. This means that business income through the corporation goes to LLC members who report their share of profits or losses on their individual tax returns.
The LLC entity is only required to file an informative tax return that resembles the character of the partnership. Single-member LLCs are authorized to report business expenses on Form 1040 Schedule C, E or F. LLCs with more than one member typically file a 1065 Declaration of Partnership form. It is important to note that the above list is not exhaustive, as each state may have additional requirements. Once established, many states require LLCs to file an annual report, which the state can charge a fee. These fees can sometimes reach hundreds of dollars per year. Every business unit is unique, but there are a few important questions you (or your lawyer) should ask yourself when deciding on your business unit. Companies can sell shares and get additional funds for growth, while sole proprietors can only receive funds through their personal accounts, with their personal loan, or by taking partners. An LLC may face similar difficulties, although as a separate entity, it is not always necessary for the owner to use their personal credit or assets.
In addition to the basic legal requirements for different types of businesses, usually codified at the federal level, there are differences between state laws regarding constitution. Therefore, it is generally considered a good idea to consult with a corporate lawyer or accountant to make an informed decision about the type of business unit that is best for your business. A limited liability company is easier to form and has fewer regulatory requirements than other companies. LLCs allow for personal liability protection, which means creditors cannot search for the owner`s personal assets. An LLC allows pass-through taxation, which means that business income or losses are recorded and taxed on the owner`s personal tax return. LLCs are beneficial for sole proprietorships and partnerships. A multi-owner LLC would be taxed as a partnership, meaning that each owner would report profits and losses on their personal tax return. This entity is owned by two or more persons. There are two types: a partnership, where everyone is divided equally; and a limited partnership, where a single partner has control of its operation, while the other person (or persons) contributes to the profits and receives a portion of them. Partnerships have a dual status of sole proprietorship or limited liability company (LLP), depending on the financing and liability structure of the company. A sole proprietorship is the type of entity that offers the greatest administrative relief: there is no formal legal structure, but one person owns and controls the business.
To start a sole proprietorship, the business owner does not need to file any official documents with the Secretary of State`s office. Indeed, from a legal and tax point of view, the individual and the company are considered as one and the same. Thus, in practice, the owner of a sole proprietorship is personally liable for all debts, losses and liabilities of the business. In addition, the owner pays all taxes and reports his profits and losses on Schedule C of his tax return – there is no separate corporation. A company has the lowest personal liability because the law states that it is a separate entity. This means that creditors and customers can sue the business, but they cannot access the personal assets of executives or shareholders. An LLC offers the same protection, but with the tax benefits of a sole proprietorship. Companies share responsibility between the partners in accordance with their articles of association.
Another advantage of LLCs is that they are extremely flexible when it comes to their structure. There is no limit to the number of owners called members, and LLCs can operate with a single owner, similar to a sole proprietorship. LLCs also allow the owner to designate a manager to manage the business, who can be one of the designated members, a non-member, or a combination of both. Incorporation: To form an LLC, you must pay a filing fee ($100 to $800) and have a by-law when the entity is formed. Company agreements are highly recommended, but not required by all states. Similar to a partnership agreement or a company`s bylaws, the LLC operating agreement establishes rules for the ownership and operation of businesses. A standard operating agreement includes: Because a C corporation is a separate legal entity, the entity, not the owners, is responsible for the company`s debts and liabilities. Similarly, a C corporation is taxed separately from its owners.
In addition, C corporations are subject to “double taxation,” meaning that income is taxed both when generated and distributed to shareholders. For this reason, many small companies form as LLCs, which have the possibility of individual taxation (only at the level of income). Here we provide an overview of the five most common entity structures. While this is intended to give you a basic introduction to entity types, you should ideally consult with an experienced business planning attorney before making a final decision and filing your company`s paperwork.