PERSONAL LIABILITY PROTECTION:
The primary reasons small business owners choose to form corporations and LLC's is to protect their personal assets, such as their home, car or family savings. In the event of a lawsuit or if your business should fail, your personal assets cannot be touched.
WHY FORM A BUSINESS ENTITY?
1. PERSONAL LIABILITY PROTECTION: The primary reasons small business owners choose to form corporations and LLC's is to protect their personal assets, such as their home, car or family savings. In the event of a lawsuit or if your business should fail, your personal assets cannot be touched, Assuming You Have Properly Formed, and maintained your corporation or LLC. This limited liability features not available in the sole proprietorship or partnership, where the participants are personally liable for all business debts. As liability insurance becomes more expensive for less coverage, asset protection is becoming more of a critical factor for entity selection. Incorporating provides another layer of complexity, giving you protection for your home and other personal assets. Forbes Magazine recently published an article stating that in the last decade, "the average jury award in court cases as a whole has tripled to 1.2 million, in malpractice it is tripled to 3.5 million and in product liability cases it has quadrupled 26.8 million according to just-released data from Jury Verdict Research." According to business statistics posted at Bizstats.com, only 22% of all small businesses in America or corporations or LLC's. Over 72% of business owners are personally exposed to liability risk. Protect yourself!
2. TAX SAVINGS: Corporations and LLC's can take advantage of tax savings options that are simply not available to sole proprietorships or partnerships. The following are some examples: *corporations can provide major self-employment tax savings. As a Corporation, only the earnings actually paid out to you as salary are subject to self-employment taxes; money left in the business is not subject to self-employment tax. All income passes through, but it's tax status depends on whether it is classified as salary or ordinary income. Here's an example. Say in 2005 you have net income of $90,000 and pay yourself $60,000 in salary, leaving $30,000 in the business area as a sole proprietor, you would pay self-employment tax on the full $90,000(90,000x15.3% equals $13,770). But as an S. corporation, you would only owe self-employment tax on the $60,000 in salary (60,000x15.3% equals $9180), resulting in a savings of $4590. *Corporations can offer deductible fringe benefits. One of the benefits of a Corporation is having a provide lucrative employee benefits that are deductible by the corporation and tax-free to the employees. Medical, life insurance, education, child care, and retirement plans are just a few of the types of benefits available. *Corporations and LLC's offer flexibility in choosing federal taxation. Corporations and LLC's have the leeway as to their method of taxation. This option is not available to sole proprietors or partnerships. *Corporations and multi-member LLC's have a lower chance of IRS audit. IRS form 1040, schedule C. (profit or loss from a business), which is used by sole proprietors to report the businesses' income and expenses, is the target of many IRS audits, however. The audit rates of similar businesses that have incorporated or formed multi-member LLC's are much lower.
3. PRIVACY: Forming a Corporation or LLC is an excellent way to keep your identity, as well as your business affairs, private and confidential. For example, a Corporation or LLC may be established in such a manner so that the shareholders/owners remain anonymous. If you want to open an independent small business of any kind and do not want your involvement to be public knowledge, your best choice may be to form a Corporation or LLC. Another manner in which a Corporation or LLC could provide privacy deals with property ownership. When it comes to owning real estate the number one rule is, don't own anything in your own name. Solid asset protection means maintaining a low profile, which is impossible if your name is splattered all over the public record. For example one can simply go to the website of the local County recorder, enter the names of several high profile individuals and print out a list of 20 or so properties owned by these individuals. That makes them sitting ducks for a lawsuit. By placing property in the name of an LLC, your name would not be associated with the property since County recorder's grantor-grantee lists only the name of the entity, not the LLC members, as the owner.
4. CAPITAL: There is a greater source of capital available to corporations and LLC's and is available to partnerships or sole proprietorships. If you plan on raising money to expand your business, a sole proprietorship or partnership may be burdensome. The sale of securities (ownership interests) in a business is a fairly complex legal matter, best facilitated by entities such as corporations and LLC's. Corporations and LLC's allow foreign investors to protect their personal assets from liabilities incurred by the business in which they invest.
5. MARKETING: the addition of the "INC." or "LLC" designator to your business name imparts credibility, reliability, size and permanence in the minds of every person with whom you do business--- customers, vendors, lenders, investors, and more. Status as a Corporation or LLC is an intelligent move, both in terms of marketing and financially.
6. CONTINUITY: Corporations and LLC's are the most enduring forms of business structure. If a Corporation or LLC owner dies, their portion of the business can be transferred quickly without interruption of the corporations operations. If a sole proprietor or partner of a partnership dies, the business may automatically and or it may become involved in various legal entanglements. Corporations and LLC's can have unlimited life, extending beyond the illness or death of the owners. The ability to survive the death or departure of any individual person gives the corporation's stability and makes it a more attractive candidate for long-term financing. Survivability also permits the corporation to raise funds by selling shares to new investors, because new owners can be added without disturbing the corporate form.
7. ADMINISTRATIVE EFFICIENCY: If a business begins with more than one owner or expects to expand beyond one owner, formation of an entity may be necessary. The formal structure of a Corporation or LLC provides not only a means for ownership interests to be divided and documented, but a set of guidelines for resolving conflicts and designating duties. In a way, the bylaws or "operating agreements" of these entities service contracts between the owners as to how the fundamental administrative matters of the business will be run.
1. Sole Proprietorship: A business owned and operated by one person for profit. The owner is the sole proprietor and there is no required formation for the business. The business terminates at the will or the death of the owner. Profits are taxed once. Profits and losses are reported on the owners' individual state and federal income tax returns. The owner may use losses to deduct other income on individual tax returns subject to active-passive investment loss rules that apply to all businesses. There is no double taxation. The sole proprietor contributes whatever capital needed to the business. Business loans may also be utilized. Generally, there is no application of state or federal securities laws. A sole proprietor may set up an Ira for investment or Keogh retirement plan and may deduct all or a portion of medical insurance premiums. The owner has full control and management of the business operations and his personal assets are always at risk. This is the easiest form of business to dissolve. The owner must pay debts, taxes and claims against the business personally.
2. General Partnership: Two or more people who jointly own or operate a business for profit. The partners own the business and the formation of a general partnership requires no formal filings and maybe express, implied, oral or written. Nevertheless, a written agreement concerning the terms and conditions of the business venture should preferably be drafted in writing.
The partnership must acquire a taxpayer identification number and if necessary register a fictitious business name. The general partnership terminates by agreement or by the death or withdrawal of a partner unless there is a specific partnership agreement to the contrary. Profits are taxed once in each partner reports his or her share of the profit and loss on his or her individual state and federal income tax returns. The partnership merely files and information return. The taxation of income is on a pass-through basis in partners may use losses to deduct other income under individual tax returns if they are at risk for loss or debt. There is no double taxation. Partners typically contribute money or services to the partnership in order to raise capital and receive an interest in profits and losses. Business loans may be utilized. Generally, state and federal securities laws do not apply. General partners and other employees may set up an Ira or Keogh plan and may deduct all or a portion of medical insurance premiums. Typically, each partner has an equal management capability unless otherwise agreed and each partner's personal assets are at risk in terms of liability. The dissolution of a general partnership can be through the payment of debts, taxes and claims against the business in general or through the settlement of partnership accounts.
3. Limited Partnership: Two or more people who jointly own a business for profit consisting of at least one general partner who manages the partnership while subject to unlimited personal liability. There is also at least one limited partner who is a passive investor with no management rights but has limited liability. The partners own the business. Unlike general partnerships, limited partnerships may only be created where there is a written agreement among the partners and a certificate of limited partnership is filed with the Secretary of State. The limited partnership is terminated by agreement or upon the death or withdrawal of the partner unless there is a partnership agreement to the contrary. Profits are taxed once in each partner reports his or her share of the profit and loss on his or her individual state and federal income tax returns. The partnership merely files and information return. Accordingly, there is passed through income loss and partners may use losses to deduct other income on individual tax returns but remain at risk for any loss or debt. There is no double taxation. Partners typically contribute money or services to the limited partnership and receive an interest in the profits and losses. Business loans may also be utilized. Generally, state and federal securities laws do not apply in general partners and other employees may set up my raises or Keogh plans and also may deduct all or a portion of medical insurance premiums.
General Partners have all management rights while limited partners have no management rights. Limited partners lose liability protection if they partake in management activities. General partners' personal assets are at risk while a limited partner is liable only to the extent of his or her investment. The dissolution of the limited partnership is through the payment of taxes or through debts or claims against the business. The settlement of partnership accounts may also dissolve the limited partnership or it may be dissolved by filing a cancellation of certificate with the Secretary of State.
4. C- Corporations: The corporation is a legal entity separate and distinct from its owners. It is considered a limited liability entity, as none of the owners are typically liable for the corporation's debts by virtue of being a shareholder area A C Corporation is a Corporation that has not made an election to be an S corporation. The business is owned by shareholders. The corporation is formed by filing articles of incorporation with the Secretary of State, a letting directors, appointing officers, preparing and adopting bylaws, issuing stock to the shareholders, and obtaining taxpayer identification number. Within 90 days after filing the articles, the corporation must file a statement of information with the Secretary of State. After incorporation, corporate formalities must be followed such as maintaining annual minutes. The corporation continues until the formal dissolution and is considered the most stable form of business. It is not affected by the death or disaffiliation of a shareholder. Profits are subject to double taxation once at the corporate level, and again at the individual shareholder level. There is accordingly no pass-through income loss. Corporations may deduct business losses but shareholders may not deduct losses. The corporation may sell shares of stock and may offer various classes of stock shares. The corporation may apply for business loans and go public if a substantial infusion of cash is needed. The issuance or transfer of stock is subject to state and federal securities laws. There are full tax-deductible fringe benefits for employee shareholders and the corporation may also deduct medical insurance premiums and reimburse employees medical expenses. Shareholders elect directors who manage the corporation. The directors must appoint officers and a rigid structure is required. In a Corporation liability is limited to the corporate assets except if the court pierces the corporate veil to impose personal liability on shareholders; whether his personal negligence or fault; or where there is a personal guarantee of the business debts involved. The dissolution of the corporation is obtained via shareholder approval and by filing a statement of intent to dissolve at the Secretary of State. It can also be dissolved through the payment of debts, taxes and claims against the business. The corporate assets are then distributed to the shareholders. Again or distribution of assets is then subject to double taxation.
5. S-Corporation: This corporation functions in the exact same manner as a regular C corporation except that it is taxed differently. It is considered a pass-through entity. The shareholders own the corporation and the formation requires that certain qualifying criteria are met and that there is a timely filing within 2 1/2 months of the first taxable year of an "S election" with the IRS. Otherwise, articles of incorporation must be filed with the Secretary of State selecting directors, officers and preparing bylaws and a tax identification number. The corporation continues until the formal dissolution and is considered to be the most stable form of business. It is not affected by death or does affiliation of a shareholder. Profits are taxed once. Each shareholder reports his or her share of the profit and loss on individual income tax returns. These corporations do not pay taxes in general. It is a pass-through taxable entity and shareholders may deduct their share of corporate losses on their individual tax returns. There is no double taxation. Raising capital is generally the same as a C-Corp. and you must limit the number of shareholders to 75. You cannot offer different classes of stock to investors except for shares that have different no voting rights. The issuance or transfer of stock is subject to state and federal securities laws. Employee shareholders owning 2% or more of stock are restricted from corporate fringe benefits under partnership rules. Otherwise the same fringe benefit allowances are in place as any C- Corporation. Shareholders must elect directors who manage the corporation and directors must appoint officers. Liability is limited to the corporate assets except if the court pierces the corporate veil to impose personal liability on the shareholders; where personal negligence or fault occurs; or where there is a personal guarantee of business debts. Dissolution occurs through shareholder approval and by filing a statement of intent to dissolve of the Secretary of State. This solution can take place through the payment of debts, taxes and other claims against the business. Corporate assets are distributed to the shareholders. A gain on the distribution of assets is taxed once.
6. Limited Liability Company: This is an unincorporated business entity that combines the limited liability protection offered by a Corporation and pass-through tax treatment associated with the partnerships and S corporations. The members of the company own the business and it is established by filing articles of organization with the Secretary of State. An operating agreement must be adopted in filed with the Secretary of State. A separate tax identification number must be obtained and within 90 days after filing the articles, the LLC must file a statement of information with the Secretary of State. The limited liability company may terminate by agreement or by the withdrawal of a member, depending upon the terms of the operating agreement. Each member reports his or her share of the profit and loss on his or her individual income tax returns. However, an LLC has the option of being taxed like the Corporation. Otherwise it is a pass-through income loss entity and shareholders may deduct their share of corporate losses on individual tax returns. There is no double taxation. The members typically raise capital by contributing money or services to the LLC and receive an interest in profits and losses. Business loans may also be utilized. Generally, state and federal securities laws do not apply to an LLC if all members are active in the business. An LLC can get benefits associated with a Corporation through tax-deductible fringe benefits in a manner similar to a Corporation. The manager or member who is the manager has flexibility in permitting parties to customize the management structure. Generally, liability is limited to the corporate assets except if the court pierces the corporate veil to impose personal liability; whether his personal negligence or fault; or where there is a personal guarantee of the business debts. Dissolution of the LLC can occur through the payment of debts, taxes and claims against the business. They distribution of all remaining assets to members then takes place and articles of dissolution must then be filed with the Secretary of State.
Millions of companies regularly conduct business in the state of California. If you have a business nexus in California, then you are part of its tax system. The following questions can be used to determine whether or not you all are or will be a part of the California tax system and whether a California corporation or LLC is right for you: *Do you live in California? *Do you have a business location in California? *Do you or your employees work in California? *Do you own real estate in California? If you answered "yes" to any of those questions, then you are or will be part of the California tax system. If you want California-based limited liability protection without paying extra out of state fees, and forming a California Corporation or LLC may be the right choice for you.
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