Basic Alphabet Soup: A Dash of LLCs, A bit of S-Corps, C-Corps
If you're looking to start a business wecan help you make sense of the alphabet soup too.
If you're curious about the best recipe for you, listed below are the basic ingredients. Please don't be intimidated, it's just alphabet soup, and you can always call on a master chef (attorney) to do the dirty work.
INGREDIENTS:
C-Corp or LLC -for this blog post(and batch of soup) these are the starting choices. (Either of these can "transform" for tax purposes to a S-Corporation but only after a tax election is accepted.)
A Dash of Limited Liability-Generally speaking, though not foolproof, both Corporations and LLCs limit the shareholder/member's liability to the amount they have invested (this normally applies for debts in ordinary trade or business, and torts (civil wrongs). This limited liability protection, makes these entities more appealing than a sole proprietorship.)
Possibly An Employee-Status - As an owner of a corporation or an officerof the corporation, you are an employee, and the corporation will pay payroll taxes on your reasonable salary. Whereas, if you form an LLC, you are not an employee (you may hire employees, but you are not an employee). And if following the default tax-treatment, you will pay self-employment taxes (just like a sole proprietorship).
Formalities - LLCs generally have fewer formalities. Generally your agreement and governing structure will be less formal (though some formality is essential for treating your business as a separate entity).
A "P" for Professionals - If you are a licensed professional, you will have to add a dash of "P for Professional" to your name and go through some additional steps to your formation process to comply with state requirements. Your business name will have to end in PLLC or P.C. respectively and you will have some additional filing requirements with the licensing authority. Hate to tell you but your soup will also be inevitably weaker than that without a P since you cannot shield yourself from malpractice liability. Specifically the law states, each member is "fully liable and accountable for any negligent or wrongful act or misconduct committed by him or her or by any person under his or her direct supervision and control while rendering professional services on behalf of such limited liability company.”
STEPS TO SUCCESS-SOUS CHEF's, HEAD CHEF? WHO'S COOKING?
-Discuss your business with an attorney-Will you have partners (now or in the future)? Will your family be involved inyour business? Who will manage the business?
BEFORE SERVING:
Before you finish the planning process for your entity, it's time to plan for how the entity will be taxed, this can be a factor in deciding which ingredients to use (or add to the mix).
-Here are the Defaults -If you don't want to stir the pot and mix-it-up, the defaults for each entity without electing a different tax status are as follows:
-Corporation will be taxed as a C-Corp
-Single Member LLC (that means you are the one and only member) would be treated as a disregarded entity (taxation works the same as a sole proprietor)
-Multiple Member LLC is taxed as a partnership
SO PICK YOUR SEASONING -Check the Box Tax Elections give you choices:
-With either entity you can make choices to change your tax status, for example, if you want to be taxed as an S-Corp (and you met the legal requirements), you can elect such treatment after forming an LLC or a Corporation.LASTLY, ENJOY THE SOUPBe sure to record your results and keep good records for your business entity once it's formed. You'll also want to make sure you have a well drafted agreement for running your business, which is why you should let an attorney handle this "fun stuff."
Enjoy your creation!
And if you’ve made a mess of things, maybe by getting into an entity online without proper advice or information, give us a call. We are experienced with clean-up of existing businesses.