Types of Business Entities
It’s ideal to start this review with a disclaimer as I’m neither an Attorney, Enrolled Agent, nor a Certified Public Accountant. This review is based on my own previous experience that I got from operating and owning several businesses during the last 40 years. The About page of Discount Registered Agents, Inc. will tell you about our philosophy in business. We have experience in restoring dissolved companies.
Limited Liability Company (LLC):
The LLC is a separate, distinct legal entity just like a corporation. Wyoming enacted the first LLC law back in 1977. Even though other States followed Wyoming’s lead and enacted their own LLC legislation, LLCs were not widely recognized and acknowledged until the IRS finally ruled on the LLC’s tax status in 1988. Since then, the LLC’s became increasingly popular such that now more LLC’s are being formed than corporations on an annual basis.
LLC’s are not as popular as Corporations which means they aren’t a good choice for you if you intend to grow your business such that you will, later on, be able to start attracting co-owners.
LLCs are not separate taxpaying entities as are Corporations. Profits and losses are passed through to the owners of the LLC and the owners are taxed on their personal income tax return. If the LLC has only one member it can be taxed as a sole proprietor or a partnership.
In many States, you can form an LLC with only a single member. Single Member LLCs are gaining popularity because a single business owner can be treated as an LLC.
Close LLCs are designed for when the members are family and close friends. Selling or transferring Membership interest is restricted. Formalities are fewer. A Close LLC is only offered in Wyoming.
L3C (Low Profit Limited Liability Company) has the characteristics of both a profit and non-profit entity. They take advantage of IRS Treasury Regs.Sec.53.4944-3(a). These are currently allowed in Illinois, Louisiana, Maine, Michigan, Missouri, North Dakota, Rhode Island, Utah, Vermont, and Wyoming.
To set up an LLC, you only have to complete the Articles of Organization and pay the Filing Fee.
An Operating Agreement is usually drawn up like in a partnership. In addition, it states the duties and obligations of the members. It also articulates how the LLC should be managed and how profits are to be divided.
LLC’s do not usually have a perpetual existence which means you have to put a dissolution date in your Articles of Organization that is usually 30 years.
Unlike with Corporations, record keeping is not really a requirement for LLC’s. You are flexible to divide the assets of the business in case the LLC is dissolved.
Series Limited Liability Company:
This LLC type is comparable to a Corporation running several subsidiaries. It’s a master LLC with a lot of divisions.
Series LLCs are offered in Alabama, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, Oklahoma, Tennessee, Texas, Utah, and Wyoming.
The reason a lot of people form LLC’s is to protect their personal assets from a lawsuit relating to their real estate holdings and business operations. Forming and maintaining a separate LLC to hold each property or part of operations can save you from legal liability. If an LLC is formed, only the properties under the LLC will be liable to legal judgment.
You could form a series LLC. A Series LLC is only required to pay the filing fee and files one income tax return each year, as long as each series member is also a founding member of the LLC. When non-founding members are added to a newly created division within the Series LLC, that new division should file a separate partnership tax return for that division.
Furthermore, liability incurred by one division does not put in danger assets titled in other subsidiary divisions of the same Series LLC.
Overall, this procedure for adding and is uncomplicated. Additional Series can be added by simply amending the Series’ “Limited Liability Company Agreement” (equivalent to an Operating Agreement for other LLCs).
Restricted Limited Liability Company:
A Restricted Limited Liability Company is a special entity that is allowed by Nevada law. Nevada is the first state in the US to allow this type of entity. The entity capitalized on Treas. Reg. §25.2704-2(b) stating that a restriction that is less restrictive than those that would apply under state law will be disregarded in valuing the interest for transfer tax purposes under IRC §2704(b). A restricted LLC is complicated to set up yourself which is why I won’t delve deep into detail.
“C” Corporation:
A Corporation is a separate legal business entity with a tax status that is separate from its owners. The existence of a Corporation is perpetual.
The corporate creditors cannot attach the shareholders with non-business assets.
To file Articles of Incorporation, you have to start by visiting the office of the Secretary of State. For a corporation, a minimum of two meetings should be held each year. One for shareholders and the other for directors. Usually, these are done on the same day, a few minutes apart.
Shareholders have to elect a board of directors to run the business for them. A business can have a single shareholder and a single director.
A corporation is taxed just like a person. Taxes are paid after the business has paid all its expenses. Taxes can be minimized by paying the owners a salary, which is a legitimate business expense and is tax-deductible. The Corporation pays taxes only on its profits and the shareholders pay taxes on received dividends. The shareholders can’t claim a loss on their tax dividends.
One advantage offered by a Corporation is the option to transfer or sell shares. In case a shareholder dies, a corporation would still be existent. If a company has plans to trade publicly, a corporation would still be the best option.
“S” Corporation:
The S Corporation comes with a special tax designation that enables the income and expenses of the corporation to be ignored at the corporation level so that the shareholders pay taxes on the net income earned and claim all losses of the Corporation on their personal income tax returns. Similar to the C Corporations, owners could be paid a salary to minimize costs.
For S corporations, the number of shareholders can not be more than 75 and they all have to be US citizens. The fiscal year for S Corporations must end on the 31st of December. Record-keeping requirements are minimal but have to be maintained nevertheless.
In partnerships and LLCs, you have flexibility in how such items are allocated as long you are not doing it to avoid paying taxes.
If we formed an S Corporation, you and I could have a partnership or an LLC where we each put in 50% of the capital. However, we can agree to allocate income 80% / 20% because you work full time for the business and I only part-time.
In an S corporation, payroll rules must be followed if the owner is to take a salary. If a partner takes payment for his services, he does so as a draw and thus avoids payroll reporting requirements.
Charging Order Protection:
In case a lawsuit is filed against a member of an LLC personally, judgment can only be satisfied by a Charging Orders which is placing a lien on their percentage of distribution from the LLC. In any case, the courts can’t force an LLC to liquidate its assets to satisfy a judgment.
When they put a Charging order against your LLC, they will be responsible for the taxes on those earnings regardless of whether you have distributions or not which is why a lot of attorneys cannot place charging orders.
In Nevada and Wyoming, charging orders also apply to small corporations.
Non-Profit Corporation:
Non Profit Corporations are tax exempt.
Professional Corporation:
This is the most ideal corporation that works for doctors, dentists, attorneys, engineers. These professionals require a professional license.
Sole Proprietorship:
If your business is a one-man-band, then going for the sole proprietorship is the best thing to do. In a sole proprietorship, if the proprietor dies, the business immediately seizes to exist and all assets will go to heirs. Setting up a sole proprietorship is easy which is the main advantage of why this should be done.
In a sole proprietorship, all business and personal assets are at risk. If the owner owes creditors, creditors can come after both the owner’s business and personal assets including their savings.
General Partnership:
A partnership, according to US Civil law is a contract between two or more persons who agree to enter into any kind of business. They combine their knowledge, property, and effort and then share into the partnership’s profits. You can use a verbal agreement to form a partnership but going professional about it is always the best decision. In a General Partnership, profits and losses are always shared.
A General Partnership has a severe liability to people affected by it which is by far its greatest disadvantage. The partners are jointly responsible in case of debts or any misdemeanors.
Limited Partnership:
Forming a limited partnership only requires you to file a certificate of limited partnership with the Secretary of State. In such a case, one or more partners contribute to the business enterprise but won’t have to participate in the enterprises’ daily activities. Limited partners are also silent partners and only liable to the extent of the investment that they would’ve made. They only receive income, tax, and capital benefits.
Restricted Limited Partnership:
This is another entity that is allowed only in Wyoming. It takes advantage of Treas. Reg. §25.2704-2(b) which states that a restriction that is less restrictive than those that would apply under state law will be disregarded in valuing the interest for transfer tax purposes under IRC §2704(b). This is complicated to set up by yourself.
Contact us at 775 782 6587 to help you set up any of these companies.
