When creating the business organization to best suit the needs of the business and the owners, it is important to be informed. At The Jayson Law Group LLC, we have noticed that one of the most frequent areas of uncertainty is whether one should be operating a business as a Corporation or a Limited Liability Company (LLC). This article hopes to demystify a few points of major concern here.
Why an LLC?
Most small businesses tend to gravitate towards LLC organization because of the simplicity of organization and flexibility of limited protection. For example, businesses holding property that is likely to increase in value especially prefer LLCs because of the tax laws written for LLCs and property ownership. With C corporations, shareholders and the corporation are subject to tax on the increased property value when the property is sold. But, in contrast, LLC members, as well as S corporation owners, are only taxed once, because the business’ tax liabilities pass to them; the LLC is not taxed on its income.
In addition, LLCs are what is called, “member managed.” This means that one or more of the owners of the business also play active roles in the day-to-day management of the business. But this means that in most situations, unless the operating agreement says otherwise, if one member leaves the LLC or becomes unable to manage the LLC, the business dissolves. Unless there is a buyout provision in the operating agreement, the remaining members must create a new LLC in order to continue the business.
Why a C Corporation?
There are several other factors that may lead owners to favor organizing their business as a corporation. For instance:
If you intend to provide fringe benefits to owners
In a corporation shareholders (owners) are often employees. The corporation can hire an owner as a CEO, pay a tax-deductible salary, and provide fringe benefits as well. The corporation can deduct the cost of benefits and they are not counted as taxable income for the employee. LLCs can only deduct a portion of benefit premiums.
If you intend to offer stock options and stock bonus incentives to employees
LLCs do not have stock to offer employees. While employees can have a membership interest in an LLC, the process can be difficult and unattractive. So, if you plan on offering partial ownership to employees as incentives or bonuses, a corporation may be better suited to your needs.
In addition to the C Corporation, there is the S Corporation. Self-employed owners, due to complex self-employment tax laws, often adopt a S Corporation. S Corporations will be discussed and reviewed in full in a later article. Check back with The Jayson Law Group LLC for more information on S corporations and self-employment tax laws.
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