Is An S-Corporation
Right For You?
If you are considering starting a business, an S-Corporation might be the best option for your specific needs. This website will explain all of the benefits and disadvantages of an S Corporation. You can also file your S-Corporation in just minutes.
Why Choose An S Corporation?
S Corporations and Limited Liability Corporations (LLCs) are similar in numerous ways. S Corporations are more restrictive than LLCs. S Corporations differ by the taxation, size of the corporation, the ownership, transferability, management and the duration of existence. Over 60% … Continue reading
S Corporation S Corporation is a type of legal entity that divides its income and loss among shareholders, who are liable to file their own tax returns. This also means that S Corporations are exempt from double taxation because they … Continue reading
S Corporation Benefits An S corporation is a great option for small business owners. This is mostly because an S corporation offers the tax advantages of a partnership along with the liability advantages of a C corporation. Limited Liability As … Continue reading
S- Corporation Formation Rules Starting a business as an S-Corporation allows business owners to enjoy the benefits of limited taxation. S-Corporations generally do not have to pay Federal income taxes. Under this business structure, the income or losses of the … Continue reading
Why Should Someone Incorporate Their Business? The reasons why someone should incorporate their business are numerous and relatively straightforward. Regardless of the type of business or service offered, elements of monetary and asset liability is always present, as is the … Continue reading
Texas S Corporation Formation FAQ Forming an S corporation in Texas has its advantages and disadvantages. Texas S corporation shareholders will reap the benefits of potential tax savings, reduced liability and risk on behalf of the owner. To protect personal … Continue reading
- California LLC vs S-Corp
- Texas LLC vs S-Corp
- The S-Corporation: The Right Structure For Your Business?
In California, a limited liability company (LLC) is a business organization in which the personal liability of its members is very limited in regard to the company’s debts or any court judgments made against it. LLCs are also in a position to offer their members tax advantages, such as permitting them to report the company’s profits and losses on their individual tax forms. In California, they must abide by the regulations found in the state’s Corporations Code.
Forming an LLC
As is the case throughout the United States, an LLC in California may have one or more members, and an LLC is established when the required form (the articles of organization) is submitted to California’s Secretary of State. The LLC will also need am operating agreement, a contract agreed to by the member that indicates how the business will be run. It may also contain other requirements, including the way in which new members are added and how the members will share profits and losses. All members must also be notified that the LLC is required to pay an annual franchise tax to the state.
Choosing a name for an LLC
Under California law, the name selected for the business cannot duplicate, or be similar to, the name of another company registered in the state, and it may not be worded in a way that could mislead consumers as to the LLC’s purpose. In addition, certain words—including “insurance company,” “bank,” “corporation” and “trust” may not be part of the company’s name.
Record-keeping regulations in California
State law requires all LLCs to maintain essential records as long as they continue to do business. They include an up-to-date list of the members’ names and addresses, information regarding the financial contributions made by the members, a copy of the operating agreement and the articles of organization, and a copy of the company’s financial statements and tax records for the past six years.
Every LLC needs a registered agent, a resident of the state who has the authority to receive official documents on behalf of the business. California law also requires LLCs to file a yearly statement that lists the names and addresses of managers, members and registered agent, as well as a confirmation of the company’s name and operating status.
Note that when a member controls the LLC’s finances and that individual’s personal finances are combined with those of the company, this is referred to as “alter-ego liability,” and the member is personally liable for those debts.
Texas limited liability companies (LLCs) are similar to LLCs in other states; yet, there are some notable differences. Business owners must recognize that although LLCs are more flexible than other corporations, in Texas the regulations are stricter than in most states. LLC members must be cognizant of the laws before establishing an LLC in Texas.
Some of the most significant differences, rules and regulations are listed below:
Regulation Begins with the Secretary of State. All necessary documentation required to form a LLC will originate Secretary of State. The name must be unique, specific and carry the designation of a LLC. There should be no abbreviations associated with the name. Business owners should also ensure that the business name is still available as many are not available.
Part of the documentation issued to the Secretary of State will include the purpose of the LLC, the names and addresses of the members and the registered agent, the details of the Texas LLC’s operating agreement and any other Texas LLC formation documents required by the state of Texas. An attorney may be required to establish a governing structure; however, a standard set of rules may be customized by purchasing a professional LLC operating agreement form online.
A Physical Agent Must be Present In Texas. In order to establish a LLC in Texas, a physical agent must be appointed and have a permanent physical address in the state. This person must be an official of the company that can accept legal papers on behalf of the company. A post office box or a telephone answering service will not qualify.
Members Must be Listed In Documents. Each of the initial members of a Texas LLC must be listed in the documents filed. Member managed businesses must always meet this requirement. The only way to circumvent this rule is to declare one member on the initial documentation and admit other members after the LLC is established.
Legislative Updates. Annually, Texas provides an update about the requirements that Texas LLCs should adhere to. Owners should be aware of the changes to remain in compliance and avoid fines or unexpected tax consequences. An attorney or tax professional can help you understand the laws associated with the new rules and regulations imposed annually.
Fees Associated with Filing for a Texas LLC. Texas LLC requires a standard filing fee of $300. Other fees and charges may be applicable at the time of the application, depending upon the way in which the application is submitted.
Other General Advantages and Disadvantages Regarding LLC.
LLCs allow members to select how the profits will be distributed amongst the members. These business entities also do not require any formal minutes, resolutions or meetings as a part of their compliance measures. Double taxation is avoided by only taxing the members’ personal earnings rather than taxation on a corporate level.
The disadvantage of a LLC is that the company may be dissolved if a member dies or if a key member becomes bankrupt. LLCs also cannot “go public” and issue shares of stock to the public to raise more money for the company. LLCs do have the flexibility of being classified a corporation, partnership or sole proprietorship for tax purposes. Many business owners enjoy the flexibility of selecting how to be taxed by the federal government.
Because of the lack of state taxes, Texas is a great location to establish a LLC. Business owners must simply decide if a LLC is the appropriate structure for their business. If the business owner selects a LLC structure, ensure that all rules and regulations are met to avoid fines and tax problems. As always, establish an Employer Identification Number to avoid any personal liability for business debt.
Entity structure is one of the most important decisions to make when establishing a business and has perhaps some of the most far-reaching implications. Although there are tax advantages to both S-Corporations and C-Corporations, the S-Corporation can present significant tax advantages to the average small business.
One of the most important advantages is the liability protection. As a sole proprietor, a business owner is personally liable for all debts and liabilities that his or her company incurs. Conversely, in an S-Corporation, which is its own entity and has shareholders rather than owners, the personal liability of the shareholders is not determined by their percentage of ownership in the business.
In addition, an S-Corporation generally incurs less tax liability than a regular corporation while at the same time providing more tax benefits than a sole proprietorship. An S-Corporation does not pay income taxes on any profits. Rather, the profits are distributed to the shareholders according to their percentage of ownership and the shareholders pay income tax on their distribution.
Besides income taxes, the structure of an S-Corporation will save money on payroll taxes that the shareholders pay. Because a corporation is its own entity, shareholder owners receive a salary and for this purpose, are considered employees. The S-Corporation pays the employer half of Social Security and Medicare taxes, leaving the shareholder to pay only the employee half of those taxes and only on his or her salary. Additionally, the federal taxes the S-Corporation pays are tax deductible. This is a considerable savings over the sole proprietorship structure wherein the sole proprietor must pay both halves of the federal taxes in addition to income taxes on the business profit.
Although having employees will necessitate filing federal quarterly and state forms, most payroll programs are able to auto-populate these forms and file them out in a format acceptable to the federal government.
The initial set up for an S-Corporation may be more expensive than for sole proprietorships since the individual state government may require that articles of incorporation be filed; there may well be annual fees and other requirements for establishing an S-Corporation, which will vary by state. However, the long-term income tax savings along with the payroll tax savings may more than offset these additional costs.
•The Internal Revenue Service has specific rules for S-Corporations that claim passive income.
•Corporations may be required to annually file additional legal forms with their state.
•Not all states have S-Corporation status for businesses.
•An S-Corporation may not issue more than one type of share.
•Financial institutions may charge more for the business accounts associated with a corporation than for a sole proprietorship.
•Affordable health insurance may be more difficult to obtain unless the S-Corporation has several shareholders.
•Since corporate tax returns are complex, S-Corporation tax returns should be prepared by a professional accounting firm and not the company bookkeeper.
Since an S-Corporation may have up to 100 shareholders, it is essential that the corporate accounting be precise and absolutely above reproach; however, this should be the standard for any business. An additional benefit, the accounting for an S-Corporation is less complex than it is for a partnership.
One disadvantage of an S-Corporation, which may not affect the majority of businesses contemplating this structure, is that all shareholders must be permanent U.S. residents or citizens.
Dissolution of an S-Corporation may generate a taxable situation if depreciated assets are distributed to the shareholders, depending on the market value of those assets.
Each business and each situation is unique; therefore the above is intended as a guideline only. Before determining the most appropriate structure for any business, the owner(s) should consult with a professional.