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A corporation is the primary choice for small business entrepreneurs who want liability protection and tax benefits. A corporation is owned by its shareholders, who elect a board of directors, who in turn appoint officers (president, secretary, treasurer, etc). As you can imagine, the paperwork to form and maintain a corporation is more work than running a business as a sole proprietor. However, the long-term benefits of a corporation are worth the extra effort.
By default, a corporation is a “C” corporation for federal income taxes purposes. A “C” corporation files its own tax return (form 1120) and pays corporate tax on its profits. If the shareholders take a dividend, that money is taxed on the shareholders’ personal returns. This is known as “double taxation”, which can result in higher taxes paid on the business. However, properly used, a “C” corporation can actually save you money, particularly if you leave earned income in the company or utilize tax loopholes, such as fringe benefits such as a medical reimbursement plan.
A corporation may choose to file an “S” election, which results in the corporation filing an 1120-S return. The S corporation does not pay federal income tax; the income or losses pass through the company to the shareholders’ individual returns. In this case, there is no double taxation as in a C corporation. However, this may not be a good thing if you have net profits that you do not spend and want to leave in the company for future investment. Most businesses start out as an “S” corporation, then later convert or form a new “C” corporation.
Contact us to see which corporate entity is appropriate for you.
Limited Liability Company
A limited liability company or “LLC” is formed with a state filing of the “Articles of Organization”. The LLC’s owners are called “members”. The LLC can designate on or more “managers” to run the operations of the company. The managers are usually also member, but they can also be third parties. Neither the members or managers are personally liable for the debts of the company.
There is no such thing as an LLC tax return. LLCs will be treated for tax purposes differently, depending on the number of members.
By default, an LLC with only one member is “disregarded” for federal income tax purposes. This means the member reports all the income and expenses on his own return. If the business is an operating company, then an individual would report the income and expenses of the company on his personal return on schedule C. If the business is rental real estate, then the income and expenses are reported on the individual’s schedule E.
An LLC can also be owned by another entity. For example, if a single-member LLC is owned by an S corporation, then the income and expenses of the LLC would show up on the S corporation’s return.
Single-Member LLC Taxed as S Corporation
Optionally, a single-member LLC can choose to be taxed as an S corporation. This requires the LLC filing an election on form 8832, then filing an S corporation election on form 2553. The LLC would need a special operating agreement to reflect this change in tax classification.
An LLC with two or more members would be classified as a partnership for federal income tax purposes, filing IRS form 1065. Like an S corporation, the LLC does not pay federal income tax as a partnership, and each owner (member) reports his share of income or loss on his personal return.
Husband and wife LLCs can choose to be a partnership or a disregarded entity for tax purposes.
A family LLC is similar to a family limited partnership and is used as a master estate planning device. The operating agreement allows for wealth transfer to heirs and significant savings in estate tax by fractionalization and discounting.
Contact us to see if which LLC is appropriate for you.
Delaware Series LLC
The series LLC is a form of a limited liability company that provides liability protection across multiple “series”, each of which is theoretically protected from liabilities arising from the other series. It is similar to a parent/subsidiary structure, such as GM and it’s various brands.
The series LLC is not available in most states, so the entity must be formed in Delaware and registered in Colorado.
Contact us to see if a Delaware Series LLC is appropriate for you.
A land trust is designed to hold title to real estate, with a separate trust for each property. A land trust can provide anonymity and privacy of ownership, keeping the true identity of the owner (beneficiary) off public records. A land trust does not file a tax return or register with the state, thus it is a low-cost option to keep your name off public records. Combined with an LLC or Series LLC, the land trust provides incredible protection for landlord by masking ownership , making it difficult for would-be plaintiffs to get a handle on who the true owners of the property are.
Contact us to see if a land trust is appropriate for you.
Family Limited Partnership
An FLP is used for asset protection as as for for wealth transfer to heirs and significant savings in estate tax by fractionalization and discounting.
Contact us to see if an FLP is appropriate for you.