Business Formation
Don’t Limit Yourself Of Your Business Goals and Potential, ALWAYS Think That The Sky Is Endless
Welcome to Entrepreneurship!! Starting a new Business journey can be exciting and stressful at the same time. Essential Bookkeeping Services is here to take the stress away from you by establishing your Business Formation. It’s a simple process that can be done within a week depending on the business structure that you select.
Becoming a Business owner will also open many more promising doors for you and your Business in the future. I strongly believe that it’s all about how you position yourself in your desired industry, know your worth and network to meet more like minded Business persons like yourself. Always think positive when you’re told No and always accept rejection with Grace with the understanding that all things aren’t meant for you but when you have a positive mindset there’s no end to your success as an Entrepreneur.
What Is LLC
A Limited Liability Company, or an LLC, is a relatively new business structure, that first appeared in Wyoming in 1977, and is now recognized by every State’s statute and the IRS. An LLC is neither a partnership nor a corporation,but a distinct type of business structure that offers an alternative to those two traditional entities by combining the corporate advantages of limited liability with the advantages of pass-through taxation usually associated with partnerships.
Limited Liability Companies are becoming more and more popular, and it is easy to see why. In addition to combining the best features of partnerships and corporations, LLCs avoid the main disadvantages of both of those business structures. Limited liability companies are much more flexible and require less ongoing paperwork than corporations to maintain them, while avoiding the dangers of personal liability that come with the partnership. Some examples of famous LLCs may surprise you – both Amazon and Chrysler are organized as limited liability companies.
Ownership of an LLC
Owners of an LLC are called “members”. Since most states do not restrict ownership, members may be individuals, corporations, and other LLCs – domestic or foreign. LLCs can generally have an unlimited number of members. Most states also permit, so-called, “single member” LLCs, those having only one owner.
Members in an LLC are analogous to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble a shareholder if an LLC chooses to be managed by a manager or several managers, because then those members who are not managers will not participate in day-to-day management of the company. If an LLC does not choose to utilize managers, then the members will closely resemble partners because they will have a direct say in the decision-making of the company.
Single– vs. Multiple-Member LLC
An LLC owner by more than one individual or entity is called a Multiple-Member LLC. All states also permit Single-Member LLCs – those having only one owner (member). By default, a Single-Member LLC is taxed as a sole proprietorship (in other words, treated as “disregarded entity” by the IRS), while a Multiple-Member LLC by default is taxed as a partnership.”
Advantages of Forming LLC
LLC is a relatively new type of business structure that combines the best features of the corporation with those of the sole proprietorship or partnership. An LLC has many advantages and benefits which cannot be enjoyed together in any other type of business.
- Personal Liability Protection:
An LLC is an entity separate from its owners. Being a legally distinct entity, the personal assets of each owner (such as a home, a car or a
personal bank account) are not reachable by business creditors. An LLC member’s liability is generally limited to the amount of money that person has invested in the LLC. Thus, LLC members are offered the same limited liability protection as the shareholders in a corporation.
- Tax Advantage:
LLCs allow for pass-through taxation, and that advantage is one of the biggest reasons for the recent popularity of the LLCs. Pass-through
taxation means that earnings of an LLC are taxed only once, basically being treated like the earnings from a partnership, a sole proprietorship or an S-Corporation. While neither partnerships nor sole proprietorships also offer limited liability protection, an S-Corporation comes the closest to an LLC. However, an S-Corporation is a much more restrictive business structure that is harder to maintain.
- Ease of Transfer: With an LLC it is easy to sell the ownership interests to third parties without disrupting the continued operation of the business. As a comparison, selling interests in a sole proprietorship or general partnership requires much more time and effort. An owner must individually transfer assets, business licenses, bank accounts, permits and other legal documentation. Ownership transfers in S-Corporations are also burdened with many restrictions.
- No Ownership Restrictions:
LLCs have no restriction on the number or types of owners. By comparison, S-Corporations cannot have more than 100 stockholders,
and each must be a resident or a citizen of the United States. None of these restrictions apply to an LLC.
- Easier to Raise Capital:
LLCs allow for many ways to raise capital. An LLC can admit new members by selling membership interests or even create a new class of members with different voting or profit-sharing characteristics.
- Greater Credibility:
As a registered LLC, a business will enjoy legitimacy and greater credibility when dealing with other companies, banks and potential partners or investors than would, for example, a sole proprietor. An LLC is recognized as a legitimate company and not as an individual engaging in business.
- Flexible Management and Ownership Structure:
Like general partnerships, LLCs are free to establish any organizational structure agreed upon by the members. Thus, profit interests may be
separated from voting interests. This offers the owners the ultimate flexibility to separate or combine the interests of the investors into the company and of the people actually running the day-to-day operation
Registered Agent Service
Corporations and LLCs are required to maintain a registered agent. Please note that a Post Office Box or other “mail service” is often not sufficient to qualify as a registered agent. If you wish to keep your company’s address information confidential, designating Essential Bookkeeping Services to act as your registered agent affords you that extra added layer of privacy. Essential Bookkeeping Services can serve as your company’s registered agent for service of process in any state for an annual fee of per year that is auto-renewed for your convenience.
What Is S- Corporation
S-Corporation is a regular corporation that has 100 shareholders or less and that passes-through net income or losses to its shareholders for tax purposes (similar to sole proprietorship or partnership). Since all corporate income is“passed through” directly to the shareholders who include the income on their individual tax returns, S Corporation are not subject to double taxation.
An eligible domestic corporation (C-Corporation) can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S Corporation. Generally, an S Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S Corporation’s shareholders include their share of the corporation’s income or loss
Filing With IRS And The State
S-Corporation Election is filed with the IRS (Election by a Small Business Corporation, Form 2553), and that election is recognized by all states. with the exception of New York, New Jersey and Arkansas, which require additional state filing.
S-Corporation vs. C-Corporation
- Like C-Corporations, S-Corporations are separate legal entities from their shareholders and, under state laws, generally provide their shareholders with the same liability protection afforded to the
shareholders of C corporations.
- Unlike C-Corporations, for Federal income tax purposes taxation of S corporations resembles that of partnerships. Thus, income is taxed at the shareholder level and not at the corporate level.
- Certain corporate penalty taxes (e.g., accumulated earnings tax,
personal holding company tax) and the alternative minimum tax do not apply to an S-Corporation.
- Unlike a C-Corporation, an S-Corporation is not eligible for a dividends received deduction (a tax deduction received by a corporation on the dividends paid to it by other corporations in which it has an ownership stake).
- Unlike a C-Corporation, an S-Corporation is not subject to the 10% of taxable income limitation applicable to charitable contribution deductions.
- Unlike a C-Corporation, ownership of an S-Corporation is significantly restricted (read next).
- Forming S-Corporation generally allows you to pass business losses
through to your personal income tax return, where you can use it to offset any income that you have from other sources.
- S-Corporation shareholders are not subject to self-employment taxes. These taxes, which add up to more than 15% of your income, are used to pay your Social Security and Medicare taxes.
- When you sell your S-Corporation, your taxable gain on the sale of the business can be less than it would have been had you operated the business as a regular corporation.
Retaining Profits of S-Corporation
Taxation of S-Corporations
As already mentioned above, S-Corporations are not subject to corporate tax rates. Instead, S-Corporation passes-through profit (or net losses) to its shareholders and those profits are taxed at individual tax rates on each shareholder’s Form 1040. The pass-through (sometimes called “flow-through”) nature of the income means that the S-Corporation’s profits are only taxed once – at the shareholder level. The IRS explains it this way: “On their tax returns, the S-Corporation’s shareholders include their share of the corporation’s separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss”.
S-Corporations therefore avoid the so-called “double taxation” of dividends in most states. There are however two exceptions to this rule:
- California: There is a franchise tax of 1.5% of net income of an S- Corporation (minimum $800). This is one factor to be taken into
consideration when choosing between an LLC and an S-Corporation in California. On highly profitable enterprises, the LLC franchise tax fees, which are based on gross revenues, may be lower than the 1.5% net income tax. Conversely, on high gross revenue, low profit-margin businesses, the LLC franchise tax fees may exceed the S-Corporation net income tax.
- New York City: S-Corporations are subject to the full corporate income tax at a 8.85% rate. However if the S-Corporation can demonstrate that a portion of its business was done outside the city, that portion will not be subject to the additional tax.
Who Can Form an S-Corporation?
S-Corporations are more suitable for small and family businesses, and for those who start their business with small investment. Also, some existing businesses qualify for S-Corporation status.
To form S-Corporation or to change your existing C-Corporation into S-Corporation (also called “Election of S-Corporation Status” certain conditions
must be met:
- S-Corporation cannot have more than 100 shareholders.
- Profits and losses must be accorded to owners in proportion with their ownership stake.
Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business
purpose.Shareholders cannot deduct losses in excess of their investment.
The corporation cannot deduct fringe benefits given to employees
who own more than 2% of the corporation.All shareholders must be either U.S. citizens or residents, estates, or
certain trusts.Can only have one class of stock. Preferred stock is not allowed.”
Retaining Profits of S-Corporation
S-Corporations (much like regular C-Corporations) are allowed to retain their net profits as operating capital. However, all profits are considered as if they were distributed to shareholders, and as a result shareholders might be taxed on income they never received (whereas a shareholder of C-corporation is taxed on dividends only when those dividends are actually paid out).
What Is A Corporation
Corporation is a legal form of organization of persons and material resources,chartered by the state, for the purpose of conducting business. Corporation is owned by shareholders, the Board of Directors governs the business, and elected officers manage the day-to-day activities. Corporations must adhere to corporate tax laws and file corporate taxes regularly.
A Corporation, also referred to as Standard Corporation, C-Corporation, or Regular Corporation, may have an unlimited number of shareholders, including foreign citizens, may be public (when shares are offered for sale to the public) or privately held (when shares are not sold to the public). Usually shares of the corporation are held by the founders, board members and private investors, such as venture capitalists, who may or may not sit on the board of directors.
C Corporation is the most common type of incorporation. C Corporation is considered to be a for-profit, state-incorporated business. Registration is done with state authorities and must abide by corporate laws in the state where it is incorporated.
Corporation provides protection to its shareholders from the corporation’s liabilities, thus the term “limited liability”. However, C-Corporations also have what is called “double taxation” – first the corporation is taxed on its profits, and then shareholders are taxed on the distributions they receive, such as profit sharing payments or dividends.
Why Should I Incorporate?
Incorporating is one of the best ways to protect your personal assets while doing business. Most people choose to incorporate solely for this reason, but it’s not the only advantage of incorporation.
For example, owning a corporation can save you tax money, allows for a greater business flexibility, reduces your chances to be audited, provides tools for better itemization, and makes raising capital less complicated.
Advantages of Incorporating
- Limited Liability: A corporation is a legal entity that exists separately from its owners or shareholders. With some exceptions, shareholders are not liable for the debts and obligations of the corporation or from any litigation where the corporation is the defendant. Some form of insurance may still be necessary, but incorporation contributes an added layer of protection (also called “Corporate Veil”)
- Tax Savings: Careful planning of your business expenses can result in lower overall tax rates. There are many tax benefits for doing business under incorporation, depending on your business income. Even if your young business becomes quite profitable soon, a corporation is entitled to many deductions otherwise not available to you, resulting in significant tax savings. An example of such tax-deductible expense would be salaries of your employees and yourself.
- Reduces Likelihood of IRS Examination (Audit): Non-incorporated businesses, particularly of higher gross income levels, are targets of many IRS Audits. Incorporated businesses have a much lower audit rate, even if they have high income levels.
- Anonymity: Depending on the state where you choose to incorporate in, a corporation can be established in such a way that shareholders/owners remain anonymous. Often the same level of anonymity can be provided for officers and directors.
- Added Credibility: A corporate structure communicates permanence and credibility, even if it’s a company with only one stockholder and employee.
- Easier Access to Capital Funding: With a corporation it is much easier to attract investors through the sale of stock.
- Easier Transfer of Ownership: Ownership of a corporation may be transferred without substantial disruption of operations through the sale of stock. This way the need for complex legal documentation is reduced.
- Flexibility of Share Ownership: Owning shares gives you the flexibility needed, among other things, to effectively capitalize your business, or to retain key employees. To further capitalize the business successful C-Corporation can be taken public in a process called Initial Public Offering (IPO). You can also issue stock or stock options to your key employees, “binding” them to the business and thus retaining them (common in hi-tech industry among others).
- Longevity: The board carries on the corporation, not the owner. That means that a corporation formation can last longer than an owner-based company such as an LLC.
Main Disadvantages of C-Corp.
C Corporations have certain disadvantages. The main disadvantage is the fact that the profit of a C-Corporation is taxed to the corporation when earned, and the corporation does not get a tax deduction when it distributes dividends to shareholders. Then when dividends are distributed to the shareholders they are taxed again at the shareholder level. This phenomenon is called “double taxation”.
Similarly, when C-Corporation has a loss, its shareholders cannot deduct it from their personal income.
C-Corp. vs. S-Corp. vs. LLC
Other forms of incorporation of business organization include S-Corporation and LLC. Each of those types of entities have certain advantages and disadvantages when compared to the common C-Corporation.
Every Journey Starts With
A First Step
Just know, when you truly want success, you’ll never give up on it. No matter how bad the situation may get.