Business Startup Tips - LLC vs S Corp - Legal Issues for Entrepreneurs
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Are you an entrepreneur, online business owner, or small business owner?
Are you confused about how to start your business?
Do you want to know the difference between a Sole Proprietorship, Limited Liability Company, or Corporation?
This course is a comprehensive overview to help you understand the differences and advantages and disadvantages of the most common business types, including: Sole Proprietorship, Partnership, Limited Liability Company LLC, C-Corporation, and S-Corp.
Most people are surprised to find out that you don't need a business lawyer to choose and form the correct business structure for your business.
For less than the cost of one-hour of legal work, you’ll be in great position to start your business and save money on a business lawyer.
LLC (limited liability company) and S Corporation are popular structures for small businesses since they avoid this double taxation burden. With these business structures, the company is taxed like a sole proprietor or partnership, meaning the company itself doesn’t file its own taxes; all company profits are "passed through" and reported on the personal income tax return of the shareholders or, in the case of an LLC, the members.
Most importantly, both the LLC and S Corp will separate your personal assets from any liabilities of the company (whether from an unhappy customer, unpaid supplier, or anyone else who might pursue legal action).
The similarities between these two business entities are significant, but the differences can be even more striking. While circumstances vary for each individual and his or her business, here are some pros and cons for each:
1. The owner of a single member LLC doesn't have to file a tax return for the LLC, as they only report the activity on their personal tax return.
2. Ease of setup: Most LLC forms are only a single page for single member LLCs.
3. Inexpensive to start: The cost of setting up an LLC is also inexpensive, usually just a couple hundred dollars.
4. Guidelines: The red tape involved in forming an LLC isn't as stringent as that involved with S corps, which also leads to savings on accountant and attorney fees, among others.
1. Self-employment tax: Single member LLC owners are required to pay self-employment tax on income generated in the LLC, which means making quarterly estimated payments to the IRS.
2. Owners of LLCs must make sure they don't pierce the "corporate veil," meaning they have to operate the LLC separately from their personal affairs. "The LLC must not be a shell but an operating entity," says Eka. "There have been cases where a business owner lost their protection because there was no distinct difference between the LLC and its owner."
S Corp Pros:
1. The key advantage of an S corp is that it offers tax benefits when it comes to excess profits, known as distributions. The S corp pays its employees a "reasonable" salary, which means it should be tied to industry norms, while also deducting payroll expenses like federal taxes and FICA. Then, any remaining profits from the company can be distributed to the owners as dividends, which are taxed at a lower rate than income.
S Corp Cons:
1 S corps have more strict guidelines than LLCs. Per the tax code, Eka says, you must meet the following standards to create an S corp:
- Must be a U.S. citizen or resident.
- Cannot have more than 100 shareholders (a spouse is considered a separate shareholder for the purpose of this rule).
- Corporation can only have one class of stock.
- Profits and losses must be distributed to the shareholders in proportion to the shareholder's interest. For example, you can't have disproportionate distributions of dividends or losses. If a shareholder owns 10 percent of the S corp, he or she must receive - 10 percent of the profits or losses.
2. It costs more to form an S corp.
3. Shareholders must adhere to the requirements at all times. If they don't, they risk disallowing the S corp election, and the corporation would be treated as a C corp with its corresponding restrictions.
4. Passive income limitation: You can't have more than 25 percent of gross receipts from passive activities, such as real estate investment.
5. There can be additional state taxes for S corps.
6. Shareholders should pay attention to paying themselves a "reasonable" salary for the work they perform for the S corp, since the IRS is increasingly scrutinizing S corps for this.
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