LEGAL ENTITIES

FORMATIONS OFFERED BY BIZRUS

LIMITED LIABILITY CORPORATION

A Limited Liability Company (LLC) is a formal business structure that is the simplest to form and maintain. Creating an LLC offers some of the same benefits of a corporation, without the costs and compliance complexity. Business owners who are looking for personal liability protection, tax flexibility, and management options may find that forming an LLC  will be an ideal choice for their company.

Here are FOUR advantages of this business structure:

  • Simplicity – Next to operating a business as a sole proprietor or general partnership, the LLC structure is the least complex and costly form of business to start and maintain from a state compliance perspective. The business registration paperwork to form an LLC is minimal as are the ongoing filing requirements.

  • Personal Liability Protection – Because an LLC is considered a separate legal entity from its members, its financial and legal responsibilities are also its own. So, if someone sues the business or the company cannot pay its debts, the LLC members are typically not held responsible. Therefore, their personal assets are at a lower risk of being seized to pay legal damages or settle debt than they would be if the business were a sole proprietorship or partnership.

  • Tax Treatment Options – By default, an LLC is considered a “disregarded entity” for tax purposes. As such, income tax is applied in the same way as it is to sole proprietorships and partnerships. Business income and losses are passed through to its members’ tax returns and are subject to members’ individual tax rates. An LLC has other tax treatment options, too. Members can opt for an LLC to be taxed as a corporation, with profits taxed at its corporate rate. Or members of an LLC can choose S Corporation election, which allows for the LLC to have pass-through taxation but with the corporate benefit of a reduced self-employment tax burden because members only pay Social Security and Medicare taxes on their income taken as salaries; members’ dividend income is not subject to self-employment taxes.

  • Management Flexibility – An LLC may be either member managed or manager managed. In a member-managed LLC, the owners handle the day-to-day management of the business. In a manager-managed LLC, members appoint one or more managers to manage the company. In most states, an LLC can appoint members of the LLC to be managers, or it can hire someone else to do the job. The manager(s) of an LLC usually have the authority to make certain decisions and run the day-to-day operations of the company while members retain authority over more significant strategic matters. Most states consider an LLC to be member-managed unless the formation paperwork indicates it should be manager-managed.

S-CORPORATION

 S-Corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

 

To Qualify for S-Corp Status, a Corporation:

  • Must be filed as a U.S. corporation

  • Can maintain only one class of stock

  • Is limited to 100 shareholders or less

  • Shareholders must individuals, estates or certain qualified trusts

  • Requires EACH shareholder consent in writing to the S Corporation election

  • Requires each shareholder have a US Social Security Number

  • Requires each shareholder to be a US Citizen or permanent resident alien with a valid United States Social Security Number

  • Must have a tax year ending on December 31

NON-PROFIT CORPORATION

A nonprofit is created for charitable, educational or other purposes – these cannot benefit the owners directly.

This allows nonprofits to operate tax-free.

Nonprofits are named for the Internal Revenue Code section they fall under. 501(c) is the most common.

A nonprofit has the same initial paperwork that a corporation has.

The only difference is Nonprofits have a mission statement that clearly defines the organization.

The purpose of the nonprofit must be laid out clearly.

 Going beyond the scope of the mission can mean loss of tax-exempt status.

 Tax-exempt status is not automatic and can be denied.

Application for tax-exempt status has to be made with both Federal and State authorities.