Corporations, Limited Liability Companies, etc.
STARTING A NEW BUSINESS:
The starting of a new business can be a positive and exciting proposition. The correct legal structure can protect your business, protect the personal assets and liability of the owners of the business, and provide more favorable tax treatment.
However, the incorrect formation, failure to follow the necessary business formalities, commingling of business and personal funds, failure to correctly advertise and market, etc, can possibly expose the individual members of a business entity (corporation, limited liability company, etc) to personal liability of the company financial obligations. It is important that you are well informed about not only the business entity structure, but how to manage this business entity to provide maximum protection for your personal liability.
TYPES OF BUSINESS ENTITIES
Limited Liability Company:
The limited liability company, commonly referred to as an “LLC”, is a legitimate business entity. The LLC is a flexible form of business entity which can be the proper business structure for the operation of a business enterprise. This type of business entity has certain characteristics of both a corporation and a partnership or sole proprietorship, depending upon the number of members of the LLC.
An election may be made, if done properly, to treat the LLC as either a corporation, partnership, or disregarded entity for purposes of taxation. The initial mis-classification of the tax election can create problems if not done properly. One of the tax advantages of a LLC is the ability to is that the incomes earned by the LLC can pass-through to the members without taxation at the business-entity level.
Corporations:
Corporations may be formed for profit or not-for-profit purposes. The proper set-up of a corporation is important for several reasons; including, but not limited to, the proper tax elections, relationships between the shareholders, the powers and duties of the controlling Board of Directors, and the proper maintenance of corporate formalities and business practices to ensure the maximum liability protection for the officers, directors and shareholders of the corporation.
A corporation can be formed by one or more individuals. The corporate formalities must be observed and practiced even if there is a single-shareholder corporation.
As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers, or directors or by transfer of its shares from one person to another.
C-Corporation:
Each corporation, upon formation, starts out as a “C-Corp”. An election may be made for a C-Corp to be treated as a “S-Corp” (a small corporation, with flow-through incomes to the individual shareholders). An overview of a S-Corp is set forth below.
A C-Corp operates as a separate legal entity. The taxation under a C-Corp is distinct and apart from its shareholders. A C-Corp pays tax liabilities at its own corporate income tax rates and files its own corporate tax forms each year IRS Form 1120. Then the dividend incomes paid to the shareholders is then subject to tax at the individual shareholder’s tax rates.
S-Corp Election:
The S-Corp begins its existence as a “C‑Corp”. The election to be treated, for taxation purposes, as a sub-chapter S corporation is not made at the state government level. The election is made with the Federal Government. If you fail to timely file the S-Corp election, then your corporation will be taxed as a C-Corporation. Once the S-Corp election is completed, the corporation is taxed like a partnership or sole proprietorship rather than as a separate business entity. Thus, the income is “passed‑through” to the shareholders for purposes of taxation and income-tax liability. Under a S-Corp, a shareholder’s individual tax returns will report the income or loss generated by the S-Corporation.
To qualify for S corporation status, the corporation must:
- Be filed in a state of the United States of America.
- Maintain only one class of stock.
- The number of shareholder cannot exceed the maximum of seventy-five shareholders.
- All of the shareholders must be individuals, estates or certain qualified trusts, who consent in writing to the S-Corp election.
- None of the shareholders may be non‑resident aliens.
- If the corporation loses its S-Corp status, may not re‑elect S‑Corporation status for a minimum of five years.
Foreign Business Entities:
Whether your business is formed and operated as a LLC or corporation, if your business actively conducts business in another state, the business entity must be registered as a “foreign” business entity. The failure to register the business in the states in which business is being conducted, may result in liability exposure to the individual members/shareholders and may disallow the business entity from being able to have access to the courts of that state for purposes of enforcing agreements and contracts, or defending against lawsuits. Competent legal advice is an important of managing your business affairs in a sister state.
The attorneys at Farris & Utley, PC can help guide you through this formation process. We can also provide you sound legal advice as to the proper methods by which to operate and maintain your business entity to provide the maximum liability protection for the individual owners of the business entities. It is always advisable to obtain good legal advice from a local attorney who can help avoid the pitfalls and problems experienced by others who fail to obtain good legal advice.
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Saint George, UT 84770
Phone: (435) 634-1600
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E-Mail: info@farrisutley.com