Corporate Taxes

HOW TO CHOOSE A COMMERCIAL STRUCTURE FOR MY BUSINESS

Entity Types

Most small business owners should create a separate legal entity to protect their personal assets. This protection is called limited liability protection, and without it, a business owner can be held personally liable in the event of a lawsuit or bankruptcy.

Determine which Entity is best for your Business

LLC

Limited Liability Company

Creating an LLC is the easiest structure to open a business as it protects the owner's personal assets in the event of a lawsuit against the company.

The LLC protects the owner through what is known as “pass-through taxation” where the taxes of an LLC are paid directly with the taxes of the business owner(s).

LLCs can have more than one owner, who are referred to as LLC members. An LLC with one owner is known as a single-member LLC, an LLC with more than one owner is a multi-member LLC.

However, LLCs are still tied to your personal taxes.

Features

You can issue W-2s to workers, but not to members.
You can issue 1099-NEC to workers and also to members.
Pays 15.3% annual taxes.
The duration of the business is unlimited.
May be owned by another LLC.
No annual meetings required

Advantage

-Limited liability protection.

By forming an LLC, only the LLC is responsible for the debts and liabilities incurred by the business.

-Transfer of taxes.

Net income/loss is "carried over" to the personal income of the member(s). This means that they can report their profits and losses on personal taxes.

-No property restrictions.

The LLC has no residency or citizenship restrictions, allowing foreign nationals to own an LLC.

-Flexible distribution of benefits

If members prefer, the LLC's net income/profit may be allocated to members in different proportions to their ownership percentage of the LLC. This is different from a corporation, as corporations must distribute profits according to the proportion/percentage of ownership of each shareholder.

Disadvantages

-Precise personal records.

As an LLC owner, you must keep precise records of your business expenses, separate from your personal finances. This is the only way to guarantee limited liability. Therefore, you should have separate bank accounts and cards to keep track of business expenses.

-Termination of LLC.

Typically, if a member leaves an LLC, the LLC is terminated and ceases to exist. This is unlike a corporation where it still exists no matter what shareholders come and go.

-Taxes on self-employment.

Although we include tax transfer as an LLC benefit, it can also be a disadvantage. Often, the taxes that are passed through and reported as the personal income of LLC members will be higher than taxes at the corporate level.

S Corporation

S-Corporation

Growing businesses face a variety of complexities during tax season, which is why when your business begins to grow, you may want to consider forming an S-CORP.

In an S-corporation, the owner or owners of the business can save about 17% on the portion under the distribution of their income if the following statements are true:

The business may pay the owner or owners a "reasonable wage."
There are substantial dividends year after year.
Payroll service costs have a positive return.
Business meets S-corporation requirements.

The S-corporation tax classification allows the owners of the business to be taxed as employees of an LLC. In an S-corporation, the business owner of the LLC pays FICA (Medicare and Social Security) and federal income tax only on his or her salary. In that case, dividends are only subject to income tax.

Features

1. Only US citizens can be members.

2. The existence of the company does not expire.

3. A person is capable of forming an S corp.

4. NO protection of personal assets

Advantage

•It has tax advantages.
They are exempt from federal income tax, except on certain capital gains and passive income.

• Asset protection

Shareholders are not personally liable for the company's debts or liabilities and, for the most part, creditors cannot go after shareholders' personal assets to recover business debts.

• Flexible characterization of income

As an owner/shareholder of an S-Corp, you can be an employee of the company and pay yourself a salary.

• Easy transfer of ownership

It is easy to transfer to other members without causing significant tax consequences.

Disadvantages

•Ownership restrictions.

S-Corps can only offer one class of shares, limiting its appeal to different types of investors.
You can only have 100 or fewer shareholders.

• Caution about salaries and dividends

The IRS closely verifies the payments they make to their employees to ensure that their wage payments are fair or accurate.

• Tax qualification errors

Happens; Sometimes, S-Corp owners can make mistakes related to IRS filing requirements related to stock ownership and other aspects of running an S-Corp, and this can cause the company to lose its S-Corporation status.

C-Corporation

C Corporation

Corporations, also called C-corporations, are a legal entity that is separate from their owners.

Corporations offer the strongest protection for their owners against personal liability, but the cost of forming them is higher than other structures.

Corporations also require comprehensive accounting, operational processes, and reporting.

Features

More than 100 shareholders.
Foreign shareholder
Limited liability
Keep profits in business without paying taxes
Investor Friendly
Unlimited shareholders.
Annual meeting of the board of directors
Possibly more expensive with the help of a CPA
Protection of personal assets.

Advantage

One of the main benefits of creating a C-Corporation is that it can attract investors very easily, as this type of business entity is ideal for investing.

The two main reasons for this are: (1) C-Corporations can offer investors different types of shares with different advantages that are very attractive, and (2) investors can buy shares from anywhere in the world.

Another big advantage of C-Corporations that makes them ideal for companies that issue stock is that there is no limit on the number of shareholders.

Nor is there any regulation on where investment funds can come from.

In other words, if you want to take your company public, creating a C-Corporation is likely the right approach for you. However, there are some downsides that you should be aware of.

Disadvantages

One of the major disadvantages of C-Corporations is double taxation.

C-Corporations are subject to corporate income tax. Therefore, the income generated by C-Corporations must be taxed at the corporate level and then at the individual level when the income goes to shareholders in the form of dividends.

This double taxation is something that deters many people from setting up C-Corporations.

However, while double taxation is a significant drawback, many tax deductions are available to C-Corporations. These deductions can often offset the impact of double taxation on corporations.

Another major disadvantage of C-Corporations is the high number of incorporation requirements that this type of entity requires.

To create a C-Corporation, for example, you'll need to develop an original name, file incorporation papers, and obtain an EIN. In addition, there are other incorporation requirements that need to be met before you can start trading, such as creating an extremely detailed operating agreement.

Your operating agreement must address a host of complex issues about your entity.

These issues may concern, for example, the type of shares to be issued, the corporation's bylaws, and annual meetings of shareholders. Simply put, C-Corporations are more sophisticated and therefore require more work.