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LLC

Should You Incorporate? – Part II (LLCs)

by Carla Palmer 26. January 2011 14:37

In my previous blog, I discussed the pros and cons of incorporating, including filing as an “S” Corporation. Now let’s look at LLCs, or Limited Liability Companies

A Limited Liability Company blends elements of partnership and corporate structures. Because LLCs provide the benefits of limited liability and create “pass through” taxation, without being subject to the many restrictions on “S” Corporations, forming an LLC is often seen as a better option.

Limited Liability Companies are are often mistakenly referred to as Limited Liability Corporations. These businesses are not incorporated. But they do have to file “Articles of Organization” with their applicable state agency.

Come tax time, an LLC can elect to be taxed as a sole proprietor, partnership, “S” corporation or “C” corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility.

Owners of the LLC (called “members”) are protected from some or all liability for acts and debts of the LLC, depending on state shield laws.

The regulations regarding Limited Liability Companies continue to evolve. Some early statutes did not allow LLCs to have just one member; the structure was considered to be a form of partnership and needed at least two. All states now allow single-member LLCs, although differences can exist in the way they are treated versus LLCs with two or more members.

A more recent change is the introduction of Series LLCs, which allow companies to have various series or “cells”, and segregate the assets and liabilities of each series.

NOTE: Not all states view LLCs the same way when it comes to liability. Always research the laws for your particular state, and consult a tax attorney, before setting up any business structure.

- Carla Palmer

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LLC

Should You Incorporate?

by Carla Palmer 22. December 2010 17:10

The decision to incorporate or not is one that faces owners of businesses large and small. Let’s examine a few pros and cons.

Owner protection from legal liability. Incorporating can limit owner liability for the corporation’s activities and debts.

  • The ability to purchase stock is attractive to many investors.
  • The corporate structuring of directors, officers and shareholders clearly defines the roles and responsibilities within the corporate organization.
  • Offering stock benefits and stock options to employees is an appealing benefit.
  • Cons

    1. The process of incorporating can be costly in both time and money.
    2. Corporations must follow established “formalities”, such as holding regular director meetings, recording all corporate activity, and maintaining the corporation’s ongoing financial independence.
    3. Profits from traditional corporations can sometimes be “double taxed”. The corporation itself is taxed for any profits earned, and individual stockholders who earned profits (by way of dividends) are also taxed. This may not be an issue for smaller corporations, whose owners often draw salaries instead of dividends; salaries are tax-deductible for the corporation. One solution to the “double tax” situation is choosing the “S” corporation tax status.

    “S” CorporationsIn general,”S” corporations do not pay federal income taxes. Instead, the corporation's income or losses are passed through to its shareholders, who must report the income or loss on their individual income tax returns. This concept is called single taxation.Thus, company losses can offset personal income made from other sources. In addition, “S” Corporation shareholders are not subject to self-employment taxes.But qualification as an “S” Corporation depends on meeting strict structure and reporting requirements. Also, “S” Corporations cannot deduct the cost of benefits for employees/shareholders who hold more than 2% ownership.
    NOTE: Always research the laws for your state, and consult a tax attorney, before establishing any business structure.

    In my next blog, I’ll discuss LLCs.

    - Carla Palmer

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    LLC


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