INC. or LLC?
Category: Business and Money
Asked by: bildbar-ga
List Price: $30.00
12 Jul 2005 06:04 PDT
Expires: 03 Aug 2005 11:29 PDT
Question ID: 542543
I am in the process of starting my own company. I plan to be the only employee and offer consulting services. I would liketo know if I should incorporate (C Corp) or form a LLC. I would like to know the financial advantages of both as well, including details such as if I wanted a credit card for the business, with an LLC would it be guarenteed personnaly?
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Re: INC. or LLC?
From: seewright-ga on 12 Jul 2005 09:20 PDT
Age old question. The INC you are referring to is probably a C-Corporation. Another corporate form that comes up in this decision is the S-Corp. Most of the literature you find on this topic covers C-Corps, S-Corps, and LLCs. (Incidentally, you must first incorporate as a C-Corp before becoming an S-Corp. You can then file an election for S-Corp.) There are basically two considerations here: tax and personal liability. A C-corp is going to have its profits taxed at the corporate level and again at the individual level. Sounds harsh, but it's not necessarily as rough as it sounds; depends on your situation. Both S-Corps and LLC have what amounts to pass-through taxation, meaning that profits are only taxed at the individual level. Liability is relatively good in all three cases, but is best in C-Corps. The reason is that case law on LLCs varies from state to state ... lack of consistency in what will actually happen under a given situation. C-Corps have been around for ages and don't suffer that problem. By the way, some states don't allow single member LLCs. If you're in one of those states then an LLC may not even be an option for you. LLCs and S-Corps may start to look alike at this point. One big difference is that S-Corps can only have one class of stock while LLCs can have multiple. This is worth noting if you ever plan on bringing other people on board. A second gotcha is that an S-Corp can't have shareholders that are other corporations (or even partnerships), which is a real problem for some types of business. READ THIS: Okay, regardless of what you choose, you absolutely must "act" like a corporation if you incoroprate. That means no mingling of personal and company assets, you have to keep minutes of meetings, etc. The point being that if you end up in court and some attorney crawls through your affairs and determines you only filed as a C-Corp for the personal liability protection, yet acted as a sole proprietor in every other way, then your personal assets will be up for grabs. That's exactly what you don't want to happen. RECOMMENDATION: I hate giving this answer, but it really does depend. If you are going to be a real-estate developer or something, LLCs can be nice. You need investors and you want to "dumb down" their control by issuing more restrictive shares, for example. S-Corps don't allow that. C-Corps can be painful because of double taxation, but may not be so bad if revenues are low for a while. Here are some links that will help educate you: General info: http://www.enitia.com/corporateform.php Arizona site, but the info seems fairly general in my opinion. Good chart: http://www.keytlaw.com/az/entities/entitychart.htm IRS comments on LLCs. Mentions restrictions: http://www.irs.gov/businesses/small/article/0,,id=98277,00.html I hope this answers your question. Let me know if there is something I'm missing.
Re: INC. or LLC?
From: esmartbusiness-ga on 15 Jul 2005 11:56 PDT
Forming a corporation is an important step for small business owners, and taking this step has many possible benefits for the business and its owners (who are also called shareholders). These benefits are, in many cases, unavailable to sole proprietorships and general partnerships. Incorporation benefits include: Limited Liability - Corporations provide limited liability protection to its owners. Typically, the owners are not personally responsible for the debts and liabilities of the business; thus, creditors cannot pursue owners? personal assets (such as a house or car) to pay business debts. Conversely, in a sole proprietorship or general partnership, owners and the business are legally considered the same and personal assets can be used to pay business debts. Tax Advantages - Corporations often gain tax advantages such as: the deductibility of health insurance premiums paid on behalf of an owner-employee; savings on self-employment taxes, as corporate income is not subject to Social Security, Workers Compensation and Medicare taxes; and the deductibility of other expenses such as life insurance. For information on the types of tax advantages your business may gain by forming as a corporation, please speak with an accountant or tax advisor. Establishing Credibility - Incorporating may help a new business establish credibility with potential customers, employees, vendors, and partners. Unlimited Life - A corporation?s life is not dependent upon its owners. A corporation possesses the feature of unlimited life, meaning if an owner dies or wishes to sell his or her interest, the corporation will continue to exist and do business. Transferability of Ownership - Ownership in a corporation is typically easily transferable. (However, there are restrictions on S corporation ownership.) Raising Capital - Capital can be raised more easily through the sale of stock. Additionally, many banks, when providing a small business loan, want the borrower to be an incorporated business. Retirement plans - Retirement funds and qualified retirements plans, such as a 401(k), may be established more easily. _____________________________________________________________________________ Forming a limited liability company (LLC) is an important step for small business owners, and taking this step has many possible benefits for the business and its owners (who are also called members or managers). These benefits are, in many cases, unavailable to sole proprietorships and general partnerships. Advantages of LLC formation include: Limited Liability - LLCs provide limited liability protection to its owners. Typically, the owners are not personally responsible for the debts and liabilities of the business; thus, creditors cannot pursue owners? personal assets (such as a house or car) to pay business debts. Conversely, in a sole proprietorship or general partnership, owners and the business are legally considered the same and personal assets can be used to pay business debts. Pass-through Taxation - LLCs typically do not pay taxes at the business level. Any business income or loss is "passed-through" to the owners and reported on the owners? personal income tax returns. Any tax due is then paid at the individual level. Establishing Credibility - Forming an LLC may help a new business establish credibility with potential customers, employees, vendors, and partners. Fewer Ongoing Requirements - LLCs face fewer state-imposed annual requirements and ongoing formalities than do corporations. Organizational Structure - LLCs are free to establish any organizational structure agreed upon by the owners. Few Ownership Restrictions - There are few restrictions on who can be an owner of an LLC or how many owners an LLC may have, unlike S corporations. hope you will find this information usefull, Robert Z
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