What is a corporation?
The corporation is a legal entity apart from the owners of the business. In essence, a corporation is separate and distinct from the owners, or shareholders, of the corporation. A corporation can own property, enter into contracts, have assets and conduct business under its own name. back to top
What are the benefits of a corporation?
The primary benefit a corporation offers is that it protects the shareholders (owners) against personal liability. A corporation offers this protection because it is a legal separate entity apart from the shareholders. As such, a corporation is responsible for its own debts.
Moreover, a corporation offers several tax benefits to its shareholders. A corporation can limit the amount of taxes it owes by taking legitimate and legal deductions. Any expense, that is utilized in the course of doing business, is commonly referred to as deductible business expenses. For example, rent; employees' salaries, utilities, motor vehicles, cost of good sold, are considered deductible business expenses.
Other advantages of owning a corporation include the fact that the sale of stock may be more attractive to investors than other forms of equity. Also, a corporation’s existence is perpetual thus allowing for it to exist beyond its founders. A corporation also has other financial and tax benefits including setting up pensions, profit sharing arrangements, and establishing stock option plans. back to top
Naming the corporation.
You are free to choose any name prefer. As part of service we perform the name check for you. The general rule is that the name must not be the same as another corporation. Moreover you must follow the company name you choose with a corporate ending of one of the following: "Inc" , "Co", "Incorporation", "Corporation", "Company", "Limited", or "LTD". Note: "Inc" is the most common and preferable designator. back to top
What is an S corporation?
An S corporation is a corporation that has elected a special tax status with the IRS. This tax treatment allows the income of the corporation to be treated like the income of a partnership or sole proprietorship; the income is "passed-through" to the shareholders. The pass through taxation of an S corporation offers a great advantage over C corporations which may be subject to double taxation.
That is, a C Corporation, for any profits generated, is first taxed at the corporate level. Thereafter, when a shareholder receives a distribution of those profits, they are taxed at the personal level. Hence, the term "double taxation".
An S corporation, on the other hand, allows income, deductions, and losses to be passed through the S corporation to the individual tax return of each shareholder. This is the essence of "pass-through" taxation, i.e., the income is passed through to the shareholders. Therefore the shareholder's individual tax returns report the income or loss generated by an S corporation. back to top
What are the advantages of an S Corporation?
For the average small business, the main advantage of an S corporation is the avoidance of double taxation. That is, the avoidance of payment of income tax on corporate net income, and then the payment of a further tax on the dividend income that is derived from the corporation. As we have stated in the previous question, an S corporation allows income, deductions, and losses to be passed through the S corporation to the individual tax return of each shareholder. This is the essence of "pass-through" taxation, i.e., the income is passed through to the shareholders.
Note: In order to qualify for S corporation status, shareholders must number fewer than 75. These shareholders must be individuals. Furthermore, the shareholders can not be non-resident aliens. back to top
What is a Limited Liability Company?
A Limited Liability Company or LLC is a separate business structure from the owners (known as members) of the LLC. An LLC ,can be viewed as a hybrid of a corporation and a partnership. An LLC is similar to a corporation as the members are shielded from personal liability. An LLC is similar to a partnership as profits and loses pass directly to the members without taxation of the LLC itself. Therefore, an LLC offers an alternative to partnerships and corporations by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation. back to top
What are the advantages or benefits of an LLC?
An LLC or limited liability company offers two primary benefits:
Protection from Personal Liability: One of the primary benefits is that an LLC offers it 's members protection from personal liability.
Pass-Through Taxation:An LLC offers pass-through taxation. This is a significant tax benefit as the earnings of the LLC are only taxed once via pass-through taxation.
Other benefits of an LLC include:
Limited Liability: For the members of an LLC, liability is limited to the amount of capital which the member has invested in the LLC. Thus, LLC members are offered the same liability protection as if they were shareholders of a corporation.
Flexible Ownership & Management Structure: In general, LLC's are free to set up any organizational structure agreed upon by its members.
Moreover, an LLC, in addition to conferring limited liability and flexibility of ownership and management, offers free transferability, continuity, and centralized management. back to top
What is the organizational structure of an LLC?
In general an LLC is owned by the members (also known as owners) of the LLC. The LLC may be managed by its members. Management by the members is the most typical method for a small business. In fact, member management, is the normal default rule of state law. If management is by the members then each member is a manager of the company. If the LLC is managed by its members, it operates like a partnership. That is, in member managed LLC's, each member of the LLC has an equal say in the management of the LLC.
In the alternative, such as in an extremely large company, if the members choose, the LLC may have a manager oversee the LLC. back to top
Can an LLC be formed with just one member?
There was a time when almost every state required the LLC to have two or more members, but that is no longer the case. This important change came in response to revised IRS regulations that clearly permitted single-member LLC's. As a result, in most states, if you plan to be the sole owner of a business and you wish to limit your personal liability, you can choose between forming a corporation or an LLC. back to top
How is an LLC taxed?
For federal income tax purposes the profits of an LLC (Limited Liability Company) “pass through” to the personal income of the members/owners. In the case of a single member LLC it is taxed the same as a sole proprietorship (i.e. typically filed on the schedule C of the owner’s personal income tax filing). In the case of a multimember member it is taxed the same as a partnership (i.e. a 1065 partnership return is filed with the IRS, with a schedule K-1 being supplied to each partner/member showing the proportional profit/loss allocated to them, with this being filed on the schedule C). NOTE: These are general tax explanations and may not apply to everyone. You should confer with the appropriate accounting/tax specialists to make sure you understand your personal tax liability. back to top
Separate Taxable Entity.
