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SMALL BUSINESS OWNER: WHICH LEGAL ENTITY IS RIGHT FOR YOUR BUSINESS

Attorney John P. Soja, P.C. • Sep 11, 2017

AS A SMALL BUSINESS OWNER, HAVE YOU WONDERED WHETHER A SOLE PROPIETORSHIP, A CORPORATION OR A LIMITED LIABILITY COMPANY (LLC) IS RIGHT FOR YOUR BUSINESS

SOLE PROPRIETOR VERSUS THE LLC OR CORPORATION

  1. Both the Limited liability Company and the Corporation form of ownership shelter you from personal liability. This means that you can’t be sued personally for business issues if you do business as one of these entities as opposed to doing business in your own name. If you are sued personally, all of your assets, both business and personal assets are exposed to claims of your adversaries.
  2. If you do business as a corporation or as a an LLC, your business name is registered with the state and your company name is protected.
  3. If you do business as a corporation or as an LLC, your business survives your incapacity or death and as a separate legal entity continues as a separate operation saving time and money in legal fees and costs for your estate in either keeping your
    business going or in winding it up avoiding without court involvement in the worst case.
  4. Both entities give public credibility to the operation as structured companies as opposed to sole proprietorship.

DIFFERENCES BETWEEN LIMITED LIABILITY COMPANY (LLC) AND A CORPORATION

  1. The LLC has more flexibility in its management than a corporation. The LLC can be a very simple operation and is operated by its members or by a manager. A board of Directors must manage a corporation’s day to day activities and must have annual meetings and an annual reporting is required.
  2. An LLC has fewer imposed annual state imposed requirements than a corporation who must have annual meeting and an annual reporting is required.
  3. An LLC can make special allocations of income and tax deductions while a corporation can not. Essentially, it is easier to withdraw money.
  4. In an LLC, members can treat themselves as employees or as self-employed individuals while corporation must have employees.
  5. More advantageous for an LLC to own real estate.
  6. An LLC has the advantage of pass through taxation where members must take the profits and losses of the business on their individual tax returns as opposed to some corporations (the C corporation) which does not allow it.

THE DIFFERENCES BETWEEN A C CORPORATION AND AN S CORPORATION

  1. The S Corporation requires that all profits and losses pass through on an annual level to the shareholders and be taxed to the them on their individual returns. This is not the case with C corporations who must file and pay corporate taxes on profits.
  2. The C Corporation is exposed to a double taxation, first on corporate profits then on the shareholders who must pay tax on distributions personally.
  3. The C Corporation may want corporate earnings to stay in place inside the corporation so that the business can grow.
  4. The C Corporation in retaining earnings can provide substantial health and medical benefits and other fringe programs for things like insurance, education and transportation cost.
  5. The S Corporation is not required to hold annual meetings or to record meeting minutes.
  6. The C Corporation may be able to raise venture capital more easily, provide profit sharing among owners, be able to provide stock options to employees more easily than an S corporation.
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