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CompassTech
01-25-2006, 10:57 AM
I am engaged in contract engineering for validation of equipment and processes. I currently operate as a sole proprietor and I am ready to incorporate.

I think tax-wise my best choice is an S-corp. But I still have a question about liability.

A friend mentioned that S-corps do not insulate the individual shareholders as well as the LLC or C-corp structures and I am confused now. I want to understand better the liability protection offered by S-corp, LLC and C-corp structures. Can anyone offer me an explanation and comparison in a nutshell?

Thanks,

Bryan

firebringer
01-28-2006, 11:06 PM
There really is no substitute for good legal advice when you are talking about your personal liability and no substitute for a good accountant when you are ready to start tax planning. What you spend, you save in the long run in both cases.

That said, I wanted to mention that if you are operating as a professional engineer, you may be forced to use a Professional Corporation. You might want to check into that before you spend money filing.

Best of Luck

Firebringer

Maverick
02-01-2006, 03:39 AM
Personally, I've not seen any state require a Professional corporation for an engineering company, though you would be wise to verify this point once you make you legal entity decision.

The information here is lengthy but there is no simple way of explaining this, so here go:

Business Structures

"Anyone in business, going into business, or anyone with valuable assets or working to acquire valuable assets, should consider forming a Limited Liability Company or Corporation."

In choosing the right business entity you should ask yourself a few questions; how easy is the structure to set-up, who controls the structure, what are the levels of liability, and what are the tax consequences?


Proprietorships
Partnerships
Limited Partnerships
Limited Liability Companies -LLC's
Corporations
S-Corporation

Proprietorships

The advantage of being a sole proprietor is that it is the easiest and simplest form of doing business. The main disadvantage is the individual proprietor is subject to full liability resulting from his business acts. If the proprietor gets sued because of a related activity, all of his personal assets as well as his business assets are on the line. He could lose everything in a lawsuit.

Sole proprietors are also subject to a 15.3% self-employment tax on all income earned from the business. Furthermore, they do not have available to them benefits such as medical reimbursement plans, certain pension plans, nor full deductibility of business related expenses.

Partnerships

A partnership is a form of business often used when two or more people get together to conduct a business enterprise. From that point on, the gain or loss of the partnership is passed through to the individual partners and is included on their individual tax returns.

The main disadvantage of a partnership is it provides no liability protection to the partners. If, for example, Joe and Don get together and form a business partnership, and the partnership gets sued and loses, then both Joe's and Don's assets are on the line. This disadvantage alone is enough to compel those considering a partnership to consider another form of doing business-usually a corporation or a limited liability company.


Limited Partnerships/Family Limited Partnership

A limited partnership is taxed like a partnership yet it has many of the liability protection aspects of a corporation. There are two types of partners in a limited partnership: the limited partners, who invest in the partnership but have no control, and the general partner (or partners), who controls the partnership.

The asset protection property of a limited partnership is held by a charging order. Which means if a limited partnership is sued a judge can issue a charging order allowing the plaintiff rights to the partnership interest. That means that the creditor only gets what the general partner decided to distribute, which is often nothing. Making the limited partnership a very powerful asset protection tool when utilized with other business structures.

The problem with the limited partnership is that the general partner has personal liability for certain lawsuits filed by the limited partners against him or in a lawsuit filed against the partnership itself.

Privacy
Asset Protection
Estate Planning
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Limited Liability Companies - LLCs

Limited Liability Company, as its name implies, provides limited liability for its members-owners, like a limited partnership provides for its limited partners or a corporation provides for its shareholders.

Unlike a corporation, LLCs provide members the power of controlling other members' ability to transfer the ownership or voting power of their membership. An LLC can be structured to be taxed as either a "pass-through" entity or as an association that pays its own taxes.

LLCs have far fewer restrictions on membership than an S-corporation has on shareholders. LLCs also allow members to participate in management of the LLC without losing their protection from liability, whereas a limited partner in a limited partnership does not have this benefit.

The main disadvantage of LLCs is that their use is relatively new in the United States and so there is no uniformity in the laws governing LLCs between the individual states. Also, because they are new, there is little case law to help you make decisions based on your state's past decisions concerning LLCs.

Holding real estate
Trading accounts
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Corporations

A corporation is considered a separate legal entity; because of this, the owners of the corporation (known as shareholders or stockholders) are not personally responsible for the losses of the business. Creditors of the corporation may look only to the corporation and the business assets for payment.

The individual shareholders are not personally liable for the losses of the business if the corporation is properly established and maintained. Although a corporation usually has more than one owner, it is possible for only one individual to create and own 100 percent of the corporation.

A corporate can be formed in its home state or any other state. The corporation is regulated by the state it was formed in. This can be very beneficial if you form your company in a preferred state like Nevada or Wyoming.

Privacy
Asset Protection
Tax Savings
Fringe Benefits
Exit Strategy for 1244
To learn how to you can use a corporation effectively, register for our How to Use a Corporation Seminar.

S-Corporations

A corporation can elect to be treated as an S-corporation for tax purposes. This means that without first being taxed at the corporate level, all income or losses are passed through to the individual shareholders. Essentially, an S-corporation is treated like a partnership for tax purposes, but it has all the limited liability protection of a regular corporation.

S-corporations, however, don't have many of the fringe benefits that regular corporations do, such as certain pension plans and full deductibility of passive losses against active income. An S-corporation can, however, help you to reduce self-employment taxes while avoiding double taxation.

Dividend potential for FICA savings
Avoidance of Personal Service Corporation status
Personnel loss to an individual

What Is A Corporation?

A corporation is a legal person, an entity unto itself, with a life and identity all its own. The corporation is not you, and you are not the corporation. A corporation is a "person" whose thoughts you can control, that can and will defend you against lawsuits, protect all your personal assets and hold title to property.

It's not surprising that roughly a million corporations are formed each year and the number is growing.

A corporation is a distinct legal entity that is separate and apart from its employees, stockholders, directors, and officers. Although it's a separate entity, it can act only through its stockholders, officers, or agents.

A stockholder (owner or partial owner) is a holder of shares of stock in the corporation and is not in legal danger except for the amount of money they have invested in the corporation. A stockholder is not the employer of those working for the corporation, nor is he the owner of corporate property. His liability is limited entirely to the money he has put into this separate legal person.

As an artificial person, a corporation's rights, duties and liabilities do not differ from those of a natural person under similar conditions, except where the exercise of duty would require the ability to comprehend, or think. That's where the Board of Directors comes in. They do the thinking for the corporation.

Proof that the directors thought on behalf of the corporation is evidenced by minutes or corporate resolutions. A corporation can buy, trade, sell and make loans, It can do literally anything you as a person can do. These thoughts and actions simply need to be documented by a resolution. When you think it through, the possibilities become fascinating. The key point to remember here is that although you may own a corporation, that corporation exists as a separate entity or person.

The Benefits of Incorporating

Just the simple act of incorporating your business can protect your personal assets, reduce your taxes and provide a universe of "fringe benefits" such as:

retirement plans
deferred compensation
annuities
life insurance
medical reimbursement plans

Incorporating from the start will diminish your personal risk by shielding your personal assets from creditors. There is no greater way to guard your wealth from the threat of lawsuits; no greater business structure to lower your taxes and audit profile; no better means of increasing your privacy, building credit and raising capital; no better way to let you live the life you want.

Who Should Incorporate?

Business incorporation is a task that every company needs to seriously consider. If a business deal goes sour or if a mistake is made in handling a customer’s request, the first reaction in today’s world is to sue. People involved in joint ventures or partnerships should incorporate to protect themselves in the case that their partner(s) are sued.

If you are considering incorporating your business, be aware that among business owners who are not incorporated, 70% pay too much in taxes. Here’s a quick look at just some of the individuals who should incorporate because their assets are at high-risk:

Business owners
Company directors
Company officers
Service providers
Property owners
Real estate agents
Building contractors
Physicians and Surgeons
Dentists
Real estate brokers
The independently wealthy

Anyone in a business or profession who interacts with people, clients, or other businesses should be incorporated.

Forbes magazine published an article in May 2002 that stated: "Since 1994 the average jury award in tort cases as a whole has tripled to $1.2 million, in malpractice it has tripled to $3.5 million and in product liability cases it has quadrupled to $6.8 million according to just released data from Jury Verdict Research."

You have a 1 in 4 chance of being sued this year alone. America has 70% of the world’s lawyers and 95% of the world’s lawsuits. Think about how much money you could be putting in your pocket rather than paying to the IRS. The bottom line is, if you’re in business, you should be incorporated.

LLCs Vs. Corporations
Limited Liability Companies - LLCs

A Limited Liability Company (LLC) combines the personal liability protection of a corporation with the tax benefits and simplicity of a partnership. In addition, they're more flexible and require less on-going paperwork than corporations.

You can form an LLC on-line

LLC Tax Treatment:

An LLC can be treated like a pass-through entity, where the profits or losses of the company pass on to the individual members. Or, an LLC can elect to be taxed as a corporation.

Formation:

A Limited Liability company is required to file Articles of Organization with the Secretary of State and the members must enter into an operating agreement. Some states have different requirements for forming an LLC.

Owners:

LLCs are owned by Members, similar to shareholders of a corporation. Members can be individuals, corporations, partnerships, or other business entities. The LLC can be managed one of two ways: member managed or manager managed.

Reasons For Using an LLC:

LLCs offer tremendous flexibility and are used for a variety of reasons including, but not limited to, rental properties, real estate and investing.

In an LLC you can allocate the way you want the profits to be distributed and it does not have to be based upon the percentage of ownership. Here is an example: There are two members in an LLC that own it 50/50. One member is an investor only who wants to protect their investment by controlling 50% of the company. The other member is the one doing all the work and gets 75% of the profits, even though he only owns 50% of the business.

Regarding your tax issue,

It depends on how much you will earn. Generally, LLC's are taxed as a partnership, letting income pass-through like in an S corp. Personally, I prefer the LLC over the S status. If you elect S status, you must do so within 75 days of your corporation filing or lose it.

When Should You Incorporate?

If you operate a business, even a home-based or part-time business, if you are thinking of starting a business, if you wish to protect your personal assets or are thinking about estate planning, then the time to incorporate is now.

Myth: "Don't incorporate until you've reached a certain point in your business, like making $50,000 per year."

Advice such as that totally ignores the possibility that a person could be sued. It only takes taxes into consideration and taxes pale in comparison to the possibility of losing everything. One should consider both taxes and liability when thinking of incorporating.

The sad part about all of this is such advice isn't even good tax advice. It's true that you have to earn some revenue before you can reap all of the tax benefits of incorporating but it's only fair to mention that there are tax benefits from losing money with the corporation too.

When you look at the tax benefits available to you through incorporating, even if you never make a profit, you will see that advice such as the above is actually a disservice to the one receiving it. This is especially true when you consider both taxes and the urgent need for liability protection.

If you're in business or going into business, the time to incorporate is now. Actually, yesterday would not have been too soon. If you get sued tomorrow, the amount of money you would have spent to incorporate will seem like peanuts.

Further, you really don't lose tax benefits by incorporating. Any advice to the contrary is simply based on a lack of understanding and a failure to consider all the facts.

When someone says don't incorporate now, they are generally coming from one of the following positions:

If you incorporate and lose money, you lose your personal tax loss deduction on your personal return. The corporation would have the tax loss, not you.

You shouldn't spend the money on incorporating until you are sure you are going to succeed. If you don't succeed, you won't benefit from lower corporate tax brackets, pension and medical reimbursement plans, and passive loss deductions available to corporations.

Consider, however, these points:

In the first situation, if you are worried about taking personal tax deductions for your business losses, consider that the law allows you to create what is commonly called an S-corporation. The S-corporation will pass through the losses to you and you can take advantage of personal tax losses.

Further, even if you don't elect "S" status for your corporation and your business becomes worthless, Section 1244 of the Internal Revenue Code allows you to write off those losses on your personal tax return. That's up to $50,000 if you're single and up to $100,000 if you're married and filing a joint return.

You simply do not lose personal tax loss benefits if you do things correctly.

Now let's consider the second position, which is that you don't benefit from corporate perks and lower tax rates up to certain income levels if you're not making money. That may be true but you can benefit from the losses now and the lower rates later.

Not only can you get the personal benefits from losses like we've talked about above, but a regular corporation, as contrasted to an S-corporation, can carry forward its losses for 15 years. That's right, if a corporation has a net loss of $20,000 in the current year, then it can discount its taxable income in the next year for that $20,000. If there is not a taxable income of $20,000 in the next year, then the corporation can discount the taxable income that it has, and carry the remainder of the loss over - for up to 15 years.

So, even if the corporation loses money, there are tax benefits and this translates into benefits for you. Even if you did not take advantage personally under subchapter S of the corporation's losses while it was losing money, you still get to write off the value of the money you put into the business by claiming a stock loss under Section 1244.

Thus, you still get personal tax benefits from corporate losses. In addition, while trying to make money with the business, you've been doing it with the personal protection of a corporation and your personal assets have not been put in jeopardy.

Those who tell you that you must make at least $50,000 a year are telling you that you'll probably fail. They're telling you that because 90% of new businesses do fail within the first five years. They are presuming you'll fail too. They're saying your corporation is going to lose money and you'll not gain any benefit from the loss.

That's just not true if you do things correctly. It's like what the successful salesperson said when asked, "Why are you so successful?" The successful salesperson simply replied, "It's all in knowing how." So, when should you incorporate? NOW! -for liability protection as well as probable tax advantages.

The LLC doesn't have the paperwork complexity of a corp. If you make over $150K per year, the LLC or S corpo. may not be the wise choice. Untimately, you need need a final consultation with a qualified tax person to verify these points.

I'm a business consultant, not an attorney or tax consultant. I did work for a group of attorneys, and was the Sr. Business Consultant having specialized in setting up and installing corp's, LLC's, Non-Profits, 501-C3s, Business Plans, International business marketing and etc.

foduu1
02-28-2014, 11:21 PM
There really is no replace beneficial legal advice if you are discussing your very own responsibility and no replace a good accountant if you are wanting to begin levy planning. Everything you invest, people preserve in the long run inside both instances.

That said, I want to to cover that if you are running as a expert manufacture, you may be compelled try using a Specialist Company. You might like to scan through that prior to deciding to spend cash filing.

shawn adam
07-04-2014, 01:42 AM
As a small business owner, your asset protection planning must extend beyond protecting personal assets by leveraging statutory exemptions. You also must carefully plan and implement asset protection strategies for your business as well. Choosing the most appropriate entity is the first step in the process.

MahaKarthi
10-08-2015, 12:27 AM
You should ask the corporate legal experts so as to get the best advice because the clauses may vary from business to business. Check out the most reliable consultant in your area and get the right suggestion with respect to taxation and liability.

maduraiweb
03-07-2017, 05:42 AM
When you start a business, Yellow pages in Madurai (http://maduraiweb.com/) ,you will have to decide which business structure (also legal structure or business form) to adopt. If you're simply in business for yourself and don't plan on hiring employees, you may be able to get by as a sole proprietorship. However, large business entities generally incorporate, which provides certain benefits in terms of liability protection and the complexity needed for a large business.

hekig24516
03-27-2020, 06:47 AM
Ya its good to know the valuable information.An LLC can be treated like a pass-through entity, where the profits or losses of the company pass on to the individual members. Or, an LLC can elect to be taxed as a corporation.

raviseo120
03-08-2021, 11:01 PM
thanks for sharing with us