Business Forms and Structures
The type of entity a future business owner chooses to form and the ownership structure used are important for a variety of reasons. They determine how the business operates, how it will be taxed, how its assets are protected, how it can grow, and its future succession. I help my clients to choose the best entities for their circumstances and goals, the most effective ownership structure, and then guide them so their business ideas can thrive as business realities.
I can meet with you and explain your options for choosing a business entity, as well as the benefits and drawbacks involved for choices, including:
- Limited Liability Companies (LLC)
- C corporations
- S corporations
- Professional Service Corporations (PC)
- General and Limited Partnerships
- Limited Liability Partnerships (LLP)
Once you have decided on the right entity for you, I can assist you in preparing the entity’s formation documents. These include filings made with the Oregon Secretary of State, other required state licensing, as necessary, and initial IRS and Oregon Department of Revenue paperwork.
S Corporation vs. Limited Liability Company (LLC)
LLC – Limited Liability Company
- Is treated like a corporation for state law purposes, limiting the liability of its owners.
- An LLC is not subject to S Corporation requirements, but has full pass-through tax benefits.
- Is ignored for tax purposes and treated like a sole proprietorship. LLC pays no tax on the LLC level.
- An LLC can elect to be treated as a corporation for tax purposes or to be disregarded as an entity separate from its owner.
- S-Corporations themselves are not subject to federal income tax. Instead, shareholders are taxed on the S corporation’s profits.
- Furthermore, there is no “dividend” tax when the S corporation’s income is subsequently distributed to the shareholders.
- The primary benefit of S corp. status is the avoidance of the double taxation that occurs with C corporations. The S corp. passes net income or net losses to its shareholders who, in turn, pay tax on such income or obtain the benefit of the loss deduction
- Distributions of cash by an S corporation to a shareholder are first applied against the shareholders tax basis in her shares and so are taxable to the shareholder only to the extent they exceed the shareholder’s basis.
- Distributions of property or complete liquidation of an S corporation will also result in only one layer of tax.
LLC member is subject to self-employment tax of 15.3% if:
a) has personal liability to debts of LLC,
b) has authority to contract for the LLC, and
c) works for LLC at least 5000 hours/year.
S corp. shareholders are not subject to self-employment tax on their distributive shares of corporate earnings.
S corp. shareholders get the benefit of loss deduction, while LLC members cannot.
No tax on distributions of property. Ideal vehicle for holding real estate.
Fewer formalities required to maintain limited liability status. Easier to pierce the veil of limited liability in an S corp.
Since a single-member LLC is taxed as a sole proprietorship, it is not recommended a person be a sole proprietorship.
It is less expensive and less complicated to set up an LLC than it is to set up an S corporation. The ability of an S corp. shareholder to take income from the corporation that is not subject to self-employment tax may make the S corp. preferable to a sole proprietorship or single-member LLC in many situations.