WHY INCORPORATE?
Our clients create some kind
of corporate entity primarily limit their personal liability in the event
something goes wrong….creditors, lawsuits, etc. There are several types
of entities available: S Corporation; LLC (limited liability company);
and C Corporation are the most common. Clients incorporate for income tax
reasons; the various entities are taxed differently.
An S Corporation works like
a C Corporation but is taxed differently. Organizational documents are
filed with the Secretary of State, annual reports are filed each year with the
Secretary of State, minutes, by-laws, votes, etc., are necessary for running
the entity. The income of the corporation flows through the corporation
to the various shareholders, so the income is taxed on the individual’s tax
return at the individual tax rate and not the corporate rate. An S
Corporation has some limitations as to the number and type of shareholders and
can have only one class of stock. S Corporation shareholders cannot be
nonresident aliens, partnerships, LLCs, corporations or most trusts.
Liability for damages arising from the operation of the corporation’s business
is limited to the assets of the corporation unless the shareholders do not act
as representatives of the corporation, follow the administrative rules
required, or are careless in some other way.
An LLC, limited liability
company is a more flexible entity. Initial informational document is
filed with the Secretary of State. An annual report is also filed; however, the
entity is governed by its Operating Agreement which is a private
document. There is less regulation and less paperwork and there is
pass-through tax treatment (individual rate vs. corporate rate). An LLC
can have any number of members (even one) and there are no restrictions as to
who may be a member. Liability is limited to the assets of the LLC unless
the members are careless.
A C Corporation requires
filing organizational documents with the Secretary of State, annual reports,
minutes, by-laws, votes, etc., similar to an S Corporation; however, the tax
treatment is different. The income is taxed at the corporation rate which
is higher than the individual rate. Liability is limited to the assets of
the corporation unless the shareholders are careless. Most small C
Corporations spend all the income on salaries and expenses leaving no corporate
income to be taxed at the higher rate, so this form can be used if the
organizational advantages are required.
This is just a brief
description of some of the entities available; please call to discuss your type
of business and which entity would work best for you. Every business is
different and requires its own analysis as to which entity is suitable.