Corporation & LLC Formation
" CORPORATION VS. LIMITED LIABILITY COMPANY."
If you are starting a new business, or you already have an established business being run as a sole proprietorship or a general partnership, it is highly recommended that you organize your business in a manner which will safeguard you from personal liability, particularly as society has become increasingly litigious. By placing a legal buffer between you and the business, you will be able to protect your personal wealth by ensuring that creditors cannot pursue you for business debts nor for tort claims should an accident occur in the ordinary scope of business. Forming either a S corporation (“S-corp.”) or a limited liability company (“LLC”) will provide you the imaginary shield that you are looking for, that is, as long as you observe basic corporate formalities and do not engage in unscrupulous business conduct which would rise to the level of warranting a court to “pierce the corporate veil.”
The other principal trait that the S-corp. and LLC have in common is that they are both considered pass-through entities for purposes of federal income taxation. Unlike a C corporation that pays income taxes both at the corporate level and the shareholder level (when distributions in the form of dividends are paid), the shareholders of an S-Corp. and the members of an LLC only pay personal income taxes. The S-Corp. and LLC are required to file an annual tax return, but it is for informational purposes only. On the state level, both Massachusetts and Rhode Island require an S-Corp. to pay a minimum business corporation tax of $456.00 and $400.00, respectively.
Although there are numerous differences between a S-corp. and an LLC, the particularly noteworthy ones are as follows:
- Ownership: LLCs can have any number of members; S corps must have 100 shareholders or fewer.
- Management: Corporations have been around for hundreds of years in the United States. The management structure of corporations are governed by statutes which, generally speaking, are quite stringent and rigid. These statutes provide that shareholders elect directors, who in turn, hire the officers. The officers are responsible for carrying out the instructions of the board of directors and the day-to-day operation of the corporation; the directors make decisions that are out of the ordinary course of business; and the shareholders make the most momentous decisions, such as whether to sell all or substantially all of the corporation's assets. The corporate structure cannot be changed by agreement of the shareholders. An LLC is also governed by statute, however, its management structure is much more flexible. Many of the laws that govern how the LLC is to be managed can be changed via an operating agreement. An LLC can be managed by the members, or the members can elect a manager, or multiple managers, to run the LLC.
- Citizenship/Residency: LLC members don’t have to be US citizens or residents. S Corp shareholders must be citizens or residents.
- Self-employment taxes: S Corps. have more advantageous default self-employment tax treatment than LLCs. S Corp owners can be considered employees and paid “a reasonable salary.” FICA taxes are taken out and paid on the amount of the salary. Corporate earnings after salary may be distributed to shareholders who only must pay ordinary income taxes. LLCs may choose to be taxed as a C corporation or S corporation.
D. Baker Law Group, P.C. is able to not only organize your S. Corp. or LLC., but perhaps even more importantly, to advise you going forward on business-related matters and litigation.