There are many different ways to organize your business. This articles discusses some information about the most commonly used business entities: the corporation and the limited liability company.Corporations.A corporation is separate and distinct from its owners (shareholders). It can enter contracts, sue and be sued. The most important reasons corporations are used are to limit shareholder liability and to separate corporate management from ownership.Corporations are managed by a board of directors, elected by the shareholders. The directors elect the officers who manage the day-to-day operation of the business. Often in closely held corporations, the shareholders, directors and officers are all the same people.Forming a corporation begins with the filing of articles of incorporation and statement identifying the registered agent with the secretary of state. The filing fee is $70.00.Once the articles are filed, the corporation must:-hold an initial board of directors meeting;-secure assets (money or property);-adopt bylaws;-issue stock; and-file appropriate tax forms.Corporations can be taxed as “C” or “S” corporations. To be taxed as an “S” corporation, the corporation must file Form 2553 with the IRS.With “C” corporations, the corporation pays income tax on net profits. The shareholders pay income tax on the net profits they receive as dividends. This double tax results in about a 44.75% tax rate.”S” corporations pass through their net income to the shareholders. The shareholders pay income tax on the corporation’s net profits, whether or not they receive any cash from the corporation. The maximum individual rate is approximately 35%, resulting in a 9.75% tax savings over the “C” corporation.Limited Liability Companies.The LLC is a cross between a partnership and a corporation. Unlike a corporation, the LLC merges ownership and management rights. It provides liability protection with the close business relationship of a general partnership. So, the LLC is often appropriate for closely held businesses.LLC owners are called members. Members manage the LLC business and receive LLC profits. The members can also elect to have the LLC managed by “managers.”.Unlike a corporation, all aspects of a member’s LLC interest are not freely transferable. A member may transfer her right to receive profits, but has to get permission from the other members to transfer management rights.A LLC is formed by filing of articles of organization and statement identifying the registered agent with the secretary of state. The filing fee is $125.00.A LLC can elect to be taxed as either:-a disregarded tax entity (sole proprietorship);-a partnership;-an “S” corporation; or-a “C” corporation.To be a disregarded tax entity, the LLC can only have one member. Then, the LLC income and expenses are reported on the member’s tax return. This is the default selection for the single member LLC.To be a partnership, the LLC must have more than one member. Then, the LLC files a Form 1065 tax return and issues the members K-1 statements. This is the default selection of the multiple member LLC.An LLC can also elect to be taxed as a corporation. This must be done by filing form 8832 with the IRS and, for “S” status, form 2553.In my opinion, no business owner should be a sole proprietor or general partner any longer. It is easy and inexpensive to form a LLC, there are no tax differences, and the owners get liability protection.Using a business lawyer to form your corporation or LLC ensures it will be done correctly and fully completed. This means you know the business is structured properly and liability protection is in place. Unfortunately, no one will tell you there is a problem until its too late – after a problem has arisen.
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