As a lawyer concentrating in agency business, I take a key role advising business clients my appropriate unit to form. Most of my clients approached me when armed with the knowledge that organized entity will generally protect them from personal liability for the acts or omissions of the company. However, the relationship between several owners, taxation issues and the treatment of assets just some of the factors that dictate the choice of the party is truly relevant to your business. By and large, there is no uniform “right” choice. A careful review of information, plans and objectives of each company must take place before the proper party is selected.

Companies and Limited Liability Companies (LLC’s) are the most commonly used units. Since most SMEs are better organized as either a company or LLC, this article presents some basic similarities and differences between the parties. I have tried to give an overview of these key elements below. But keep in mind that the information below, by itself, will not allow you to make the right, informed choices at parties. This should always be coordinated with the assistance of a lawyer and an accountant.

C corporation

Most large companies are C business. All publicly traded companies are C business. The “C” designation comes from Section C of the Internal Revenue Code, applicable corporate taxes. There are various reasons for C corporations are more appropriately suited to large companies. Many categories of stock, unlimited numbers and types of shareholders, financial vs. calendar tax year and retention of corporate profits are just a few of the major differences of the C corporation. Generally, this structure is desirable for companies seeking to raise capital publicly or different categories of investors.

Most importantly C companies subject to taxation. This means that all income of C corporations are taxed once at the corporate level, then these same income is taxed again at the shareholder level when profits are distributed through dividends. In my C companies, double tax can sometimes be avoided by excluding net income each year by making payments to shareholders-workers. Shareholders shall report any dividend income as capital gains on personal profitability.

A corporation starts the C corporation for tax purposes. All businesses are automatically recognized as C companies, except elect “S” corporation tax treatment of shareholders, which is discussed below. Taxable income of C Company (after deductions for wages, business expenses and depreciation of furniture and equipment) is taxable to the company itself. The C corporation would only be taxed on income “effectively connected with a United States”, which begins on the corporate tax rate of 15% for the first $ 50,000 of corporate taxable income each year.

If a company is classified as a “personal services business” (PSC), which pays 35% flat rate of one dollar of net profit. This is generally undesirable entity type. PSCs are C company shareholders have engaged in the performance of personal services in the field of accounting, actuarial science, architecture, consulting, engineering, health and veterinary, legal, and performing arts. The lowest 15% tax rate is only available in a limited liability company performance personal care if the person is not employed by the company at least 6% of the issued stock corporation. Otherwise, the top personal tax rate would apply to taxable income of service in the company. A PSC is a C corporation by definition. So timely made S-elections, as discussed below, would negate the classification of business that PSC and avoid the 35% flat tax rate.

There are some unique tax advantages gained by the use of C corporation. Some of the main advantages of the real small businesses are able to reduce all premiums paid health insurance for owners who are on the job, with the spouse and dependents. In addition, a C corporation can accept Merpins (medical, dental and Drug costs Repayment Plan) when the fiscal year, which can make effective retroactive to the beginning of the fiscal year can buy disability insurance for one or more managers or other employees. AC company can also reduce premiums from disability insurance without cost be taxable in the executive or employee. Finally, C companies can reduce contributions to qualified retirement plans.

In terms of ownership, shareholders have limited liability under the stock (or part) of the corporation. Companies give stock certificates to shareholders to show ownership percentage in the company. C company may have different classes of stock, such as common and preferred stock, offering different distribution and voting rights of shareholders. Shares may be freely transferred or redeemed without company. Under Illinois law, like all other states, shareholders companies usually enjoy a complete liability shield from the acts or omissions of the company itself. Shareholders elect a board, which then manage the business and affairs of the corporation. Illinois require the president, secretary and treasurer be appointed as officers of the corporation, if the company sole-shareholder is allowed.

approved organization Governing the document. The approved control business and issues corporations (both C and S companies) and specify mattes such as the number and powers and duties of the board, voting shareholder rights, liquidation of a company, the annual and special meetings and other business rules. Typically relationship apply owners (shareholders) in a small or closely kept company is controlled by the stock purchase or stock limitation agreement or similar document. This device can provide for shareholders, purchase and sale of rights, restrictions on the sale or transfer of shares and company stock options, among other issues. In all jurisdictions, companies must have a set of statutes that apply to the company or companies will be subject to default provisions set forth under state law.

Keep in mind, the relationship between the owners (shareholders) of the company can also be controlled by a separate instrument, such as a stock purchase agreement, or restriction of shares, shareholders agreement or similar document. This document regulates usually share transfer and the purchase of additional stock and the Company and / or shareholders’ stock options.

C companies are best for active companies with similar evaluation and the strong possibility of offering shares publicly. C companies generally keep their income in the early stages of growth and not distribute corporate earnings to shareholders in an effort to appreciate.

S corporation

AN S Company is, just like a C corporation. Shareholders benefit from the same general shield from personal liability for the acts or omissions of the companies.

The main difference lies in the tax treatment of S corporations. As stated, the C company subject to taxation at the corporate level and shareholders are then subject to taxation in the same stream of income when distributed in the form of dividends. By contrast, the S companies to avoid double taxation where only individual shareholders are taxed. S corporation status is achieved by electing such tax treatment institution (IRS Form 2553). Profit or loss on costs for S companies, including staff remuneration and shareholder-employees, is reported on the federal Form 1120S and “went through” the personal shareholder return through the Schedule K-1, where it is subject only to ordinary income taxes . In addition, pass-through losses limited basis taxpayer in the stock of S corporations.

All salaries are subject to self-employment (payroll) taxes. S companies must pay fair compensation to the employee shareholders in return for services as an employee provides the company with no salary before distribution can be the shareholder-employee. The S corporation pays the employer’s share of Fica taxes (7.65%), and the employee pays the sharing Fica taxes (also 7.65%). Between S Corporation and its shareholders, wages are under about a combined 15.3% of the payroll, as well as the income tax rate of the shareholder concerned. So all things considered, a shareholder employee should only pay minimum wage to their homes to reduce the amount of taxes paid on companies’ profits in. IRS rules require that the fair wages shall be paid to shareholders and employees (failure to do so is considered by many to call conducted an internal audit). But, all other revenues avoid self-employment taxes and can either ordinary income or capital gains. This means that payroll taxes would have to pay fair wages (salary) Employee-shareholders only by, and not the distribution of S Corporation.

When you have to pay wages? According to the IRS, fair compensation is determined by a shareholder employee did for S corporation. The IRS will look at the source of the gross receipts of S Corporation: 1) shareholders 2) service staff outside shareholders, or 3) capital equipment. If the gross receipts and profits come from items 2 and 3, it does not need compensation to be paid to shareholders worker. However, if most of the gross receipts and profits are associated with the shareholders personally service, then most of the profit distribution shall be allocated as compensation. (Of course, you should ask your accountant for details).

Even if the income is not distributed to shareholders and left as operating capital, it will still be taxable to individual shareholders. This is because all income through to shareholders automatically. Shareholders in a C corporation are only liable for taxes on the dividends they receive actually (but undistributed income of the company is not subject to self-employment tax).

Some Disadvantages S election situation are deductions for health insurance, disability insurance, automobile, and medical drugs and dental plan reimbursement would be taxable to S corporation shareholders are paid.

Among other major differences, the S company less flexible than C corporations and LLC’s. Only a limited number of shareholders, usually only individuals, and no foreign shareholders are allowed. In this sense, the S companies usually more suitable for small and well cared for companies that do not seek to raise large amounts of capital publication. As with C company, shareholders are limited liability company as their stock in the company. However, only one category of stock with respect to distribution, unlike the C corporation.

S corporations are generally suitable for active companies with low debt, no assets of high risk and low risk of a significant increase from All business income are usually distributed to shareholders.

Limited Liability Company (LLC)

An LLC, or corporation, offers the same personal liability shield each of the owners of business offers . However, it provides significant flexibility in terms of the treatment of capital contributions and the allocation of profits and losses to their owners. Specifically, the LLC can distribute profits in a way its members see fit. For example, assume that you and your partner are in the LLC that you contributed $ 80,000 in capital and your partner contributed only $ 20,000. If your partner carries 80% of the work, the owners could still decide to divide the profits 50/50. However, if you and your partner shareholders in S company, you would be required to distribute 80% to you and 20% partner with the law. This can be an unfair way to structure your business if you have any partners.

The LLC is taxed as a partnership, which gains and losses are “through” to its members and there is no entity level tax. The LLC avoiding double taxation, then just as S corporations. (Again, some countries imposes taxes on income LLC is). The LLC income is reported on Form 1065 and then distributed to the owners of Schedule K-1. The owners then report this income on their individual returns (1040) on schedule E. If the LLC has only one owner, the IRS automatically treat the LLC as if it were a private company (a “account creation”). A no entity does not file a tax return and the owner reports revenue through program C individual return him or her. If the LLC has multiple owners, the IRS automatically treat the LLC as if it were in operation. However, LLC is known as “check the box” party, which means that it may elect to be taxed as a corporation or partnership.

terms self-employment tax , there is a lot of confusion when it comes to LLC members. Generally, the difference whether you are treated as a general partner in comparison with the limited partner is important to determine the self-employment tax liability where the LLC is taxed as a partnership. If a member of the LLC is considered limited partner, there is no self-employment tax of members of the LLC income (except for any “guaranteed payments”). If a party is considered the general partner, he or she must pay self-employment tax on all income LLC. However, according to 1997 IRS Proposed Regulations Treasury Section 1.1402 (a) -2, if the LLC member is personally liable for the debt, is authorized to bind the LLC Agreement or to provide more than 500 hours per year to the LLC, party will be taxed as a general partner and will be self-employed tax obligations in their LLC revenue allocation. Otherwise, the member will be taxed as a limited partner and will not have the self-employment tax obligations on their allocations LLC revenue.

It is also possible that the LLC will be two categories of interests, one of which is considered public partnership and one that is treated as a limited partner interest. If a partner or member of the owner of the interests of both categories, the member will be able to allocate their income allocation between the two categories and will have to pay self-employment taxes on the general partner shares, but not the limited partner shares. 1997 proposed regulations have never been officially approved by the IRS, but they have been relied on by many experts and taxpayers. Also, IRS representatives now that they can rely on.

All profits and losses distributed to the members of any “reward” (generally including any insurance payments) paid to them are considered self-employment income and are subject to self-employment tax. Owners LLC are considered to be self-employed and have to pay self-employment tax equal 15.3%. Remember, the S corporation, only wages and not allocation to employees shareholders, subject to employment taxes. Thus, S Corporation provides significant savings employment tax to its shareholders in contrast to the LLC.

LLCs provide limited liability protection in most cases if properly and maintained, but usually few or no tax benefit private or generally have to. One important benefit of the company, LLC which is the ability of the parties to limit the transfer of the membership interest in moving economic growth alone. This means future members can be limited to receiving the allocation (and pay taxes on the distributions) but without the accompanying voting or management rights. When a shareholder corporation transferred its shares, all qualities ownership including voting rights accompanying transfers unless the stock is not voting stock.

Owners LLC are called members and each Member State is not the percentage of the LLC by virtue of participating shares. Similar to C Company, LLC can create different classes of membership interests. Members can be companies and other LLCs, providing ultimate flexibility in the ownership of this person. An LLC is generally controlled member, where the business and affairs of the LLC is managed by the members themselves, or can be a manager managed LLC if either member executive or non-executive director appointed instead. Most small business LLCs are usually controlled member. Illinois allows single-member LLCs, as most if not all other states. Illinois also allows professional service providers, such as lawyers and doctors, for example, LLC to conduct their business, unlike many other countries.

Operating Agreement governing document LLC. It is similar to corporate approval and supervision basically the same factors. However, most jurisdictions specify the content that needs to be included in the statutes and operation contracts and there are of course different provisions. Also, the relationship between the members of the LLC stated in the operation of the agreement, the companies typically use a special device to certain rights of shareholders, such as transfers of stock and company buy-out rights.

residential investment companies that own other assets commonly expose their owners risk of liability are usually right for LLC’s. Of course, if you have one or more partners and want to be flexible with how the company distributes profits (and losses) to the owners, the LLC is probably the best choice.