FAQs For LLCs, Business Law
Q: Should I form a company or not?
A: The main advantage of incorporating or forming a limited liability company, (“LLC”) is to protect personal assets such as bank accounts, stocks and bonds, recreational vehicles, and real estate other than homestead. General partnerships do not shield personal assets.
Q: Can a corporation or an LLC consist of one person?
A: Yes. One person can be a corporation or an LLC. That one person would be the shareholder, board of director, President, Vice-President, Secretary and Treasurer, or member and manager in case of an LLC.
Q: What is an LLC?
A: The owners of an LLC, called members, get many of the same tax benefits as a partnership and enjoy the limited liability benefits of a corporation.Typically, unless the members choose otherwise, an LLC is taxed almost exactly the same way as partnerships and sole proprietorships. Profits and losses are passed through to the members of the LLC, and there is no income tax at the business level, or double taxation.
Choosing the LLC can bring you some significant tax disadvantages, however. For example, the profits you receive from the LLC most likely will be subject to self-employment taxes to cover the Social Security and Medicare taxes. Like a corporation, the members of an LLC are generally shielded from personal liability for the LLC’s debts and obligations.
Q:What is an S-Corporation?
A: You have heard the word “corporation” for years, and the first thing that probably comes to mind is a huge business with hundreds of employees that sells goods and services all over the country or the world. True, there are many such corporations. But, your business doesn’t have to be huge in order for you to form a corporation. In fact, one type of corporation, called an “S- corporation” or “S-corp,” is a common form used for new small businesses and can be one person.
An S-corp is basically the same thing as a C-corp except that the S-corp has elected a special federal tax status, namely, S-corporation tax status. The election is made by filing Form 2553 with the Internal Revenue Service (IRS). So, what exactly does S-corp status mean? It means that the corporation will be treated like a partnership, limited liability company (LLC) or sole proprietorship for tax purposes: business profits and losses “pass through” the corporation directly to the owners or shareholders, who in turn report the profits and losses on their individual tax returns.
A regular C-corporation is taxed much differently; in fact, there’s “double taxation.” A C-corp must pay taxes on the corporation’s profits, and then the shareholders or owners have to pay taxes on money they receive from the C-corp, such as salaries or stock dividends. Perhaps the biggest advantage of choosing a corporate form for your small business is the “limited liability” you’ll have. Just like any other corporation, an S-corp will shield you from personal liability for the corporation’s debts and obligations.
Q: What are the disadvantages of an LLC or a Corporation?
A: The maintenance and formality of an LLC or corporation is somewhat inconvenient compared to a sole practitioner. Further, a separate tax return will have to be prepared for the LLC or corporation in addition to the personal tax return, therefore a CPA is usually necessary.
Q: Are profits split according to the percentage ownership in the LLC or corporation?
A: Not necessarily, this is a common misnomer. Profits do not have to be split in the percentage of ownership. The board of directors can decide to pay out profits in the form of bonuses to the officers rather than to the owners. Further, the board of directors can pay investors a percentage of profits on a per project basis or other arbitrary agreed upon criteria.
Q: Should I be a minority shareholder in my friends company?
A: If you are, you should require that you also be a member of the board of directors or a manager in an LLC; otherwise, your investment can be at risk. An owner cannot demand any return on its investment because the majority shareholder or member who is also likely the President, can take the profits out of the company as bonuses.
Q: What is the experience of the Law Firm of Joanne M. Badeaux, P.C.?
A: For over 25 years the law firm of Badeaux and Associates has been involved in structuring, negotiating and preparing documents for incorporating, forming LLC’s, succession planning, employment contracts, buy/sell agreements, non-disclosure and non-compete agreements, franchise reviews, and NASA subcontracts for hundreds of transactions.