At some point, when starting a new business, you need to decide on a business structure, or an entity type. The key considerations are which structure is going to give your business the best legal protection and the best tax benefits. The two most common legal entities are a corporation and a Limited Liability Corporation (LLC). The primary difference between the two is that a corporation is owned by the shareholders and the LLC is owned by one or more individuals.
Seeking the advice of the business law attorneys at San Luis Obispo’s Toews Law Group Inc. is going to give you the best guidance for choosing between a corporation or an LLC. Both entities offer benefits and discussing your business goals with an attorney is going to help choose the best legal entity.
The basic benefits between a corporation and LLC include exposure of the owners or shareholders to liability and taxation. For example, a corporation is generally responsible for filing and paying corporate taxes, with some exception in the case of an S corporation. For an LLC, you can choose to be taxed as a partnership or as a corporation.
The advantages of limited liability
Limited liability is a way to legally protect personal assets and ensure that personal liability for any business debts and legal obligations does not exceed the amount of money you invested in the business. Limited liability protects your home, personal assets, and vehicles from being used to pay off business debts or obligations.
Corporations, LLCs and taxes
How a business is taxed is one of the most significant differences between a corporation and an LLC. The business law attorneys at the San Luis Obispo Toews Law Group, Inc. are well prepared to give you the best advice for choosing the legal entity for the best tax benefits.
- For an LLC, taxes pass through to the owners. Profits and losses are reported on individual tax returns instead of the business tax returns. Each owner receives any tax benefits of business losses, which may be written off against other income. Each owner is also obligated to pay taxes on his or her share of business profit. Owners may also be required to pay self-employment taxes and any franchise tax levied by the state. Failing to file and pay taxes can result in penalties and dissolution of the business. An LLC provides some flexibility because the owners may elect to have the LLC taxed as a corporation.
- Corporations are a separate legal entity earning its own income and is taxed as such. A corporation is taxed on its profits and on dividends that may be distributed to shareholders. Dividends are not tax deductible, meaning both the corporation and the shareholders pay taxes on dividends. Salaries are tax deductible for a corporation, but not for the employees, meaning that a founder of a corporation can receive a salary, but is responsible to pay income taxes on that salary. A corporation can deduct the cost of doing business, such as salaries, rent, inventory purchases office supplies, advertising and corporate contributions to employee benefits.
- If a corporation has fewer than 100 shareholders, it can elect to file as an S Corporation, an IRS tax status that allows the business to be treated as a pass-through entity similar to an LLC. The advantages of an S Corporation include: protecting the personal assets of the shareholders, protects shareholders from the debts and liabilities of the corporation, business losses are “passed through” to the shareholders personal income taxes, shareholders can be employees of the corporation, interests in an S Corporation can be freely transferred without adverse tax consequences, and S Corporations can opt for the cash method of accounting depending on the circumstances.
It is important to seek professional guidance for choosing a legal entity for your business so that you fully understand the benefits and drawbacks of each and are able to get the most benefits from your business. Those benefits often include being able to control and manage your business yourself.
Ownership, control and management
Basically, a corporation is owned by its shareholders and subject to control by the Board of Directors. Forming as an S Corporation may give you and your business partners control of the business when you are all shareholders. An LLC gives you and your partners control over your business. The degree of control you have over managing and guiding your business into the future is another consideration for choosing a legal entity. A thorough business plan that clearly states your short-term and long-term business plans is going to help your attorney provide the best advice possible.
Despite the best foundation and plans for growing your business, surprises are going to happen. The San Luis Obispo business law attorneys from Toews Law Group. Inc. offer a complete range of business law services from help you choose the best legal entity to providing counsel to help the daily business operations run smoothly. The business law services include:
- Preparing and negotiating contracts and other legal documents
- Compliance with local, state and federal regulations for employees, licenses and permits
- Preparing, reviewing, modifying and filing Articles of Incorporation
- Preparing, reviewing and modifying partnership agreements
- Providing legal counsel for expanding your business, reviewing contracts, loan agreements, insurance policies and more
- Helping you establish a solid business foundation that minimizes business and personal risk
Call for your appointment today.