Business Entity Formation
Business entities can take many different forms – sole proprietorships, partnerships, limited liability companies (LLC), and corporations are the most common ones. Although they are simple and have the most flexibility and least regulation, sole proprietorships and partnerships fail to protect the company’s assets and the owners’ assets, and they fail to take advantage of many of the tax advantages of other types of entities. Additionally, entities such as LLCs and corporations tend to present a more professional image and allow for greater future growth.
Corporations
There are a few different types of corporations: non-profit corporations, C corporations, and S corporations. Non-profit corporations must qualify as such under the restrictions of Federal law as stated in the Internal Revenue Code, one of the most important of which is that they must be formed for a charitable, educational, or other purpose as defined there.
When incorporating a for-profit company, the default form with the IRS is a C corporation. Companies must elect with the IRS to be treated as an S (small business) corporation for tax purposes, should they wish to do so, and if they meet certain criteria, such as having no more than 100 shareholders, not having shareholders that are partnerships, corporations or non-resident aliens, and having only one class of stock.
C corporations are taxed on their profits, and the shareholders are taxed on the dividends they earn (if declared and distributed), which can result in “double taxation.” S corporations have their income or loss pass through to the shareholders, who report that on their personal tax returns and pay tax at their individual income tax rates. Certain pass-through entities and owners may be eligible for favorable tax treatment under the 2017 Tax Cuts & Jobs Act.
LLCs
LLCs are similar to corporations in that they provide a shield to personal liability, and they also enjoy the benefits of pass through taxation, including the possible favorable tax treatment under the 2017 Tax Cuts & Jobs Act. Some have even argued that they provide an even better shield to personal liability than corporations.
Additionally, when compared to S corporations, LLCs have fewer restrictions relating to the number and types of owners, and in Texas and many other states, there are less administrative requirements. Also, the form and structure of LLC management is more flexible when compared to corporations.
Comparisons and Considerations
Corporations and LLCs create a legal “person,” (separate entity with rights like a person) that insulate owners’ legal liability for the debts and actions of the company. In Texas, and in most other states, both corporations and LLCs can be owned and managed by just one person.
Importantly, however, in order to ensure the limitation of personal liability, all must follow certain financial, accounting, recordkeeping and operational formalities.
It is always important to consider the costs and benefits, advantages and disadvantages from legal and tax/accounting perspectives. Thus you should talk with your attorney AND your accountant to discuss your unique situation, possible future scenarios, and other considerations before rushing into formation without proper advice.
Discounted Pricing for Business Formation!
From now until March 31, 2018, we will offer anyone who mentions this blog post a special price for our legal services related to forming a business entity. During that time, we will take 25% ($300) off the normal price of forming a corporation or LLC, making the price only $900, plus the filing fee owed to the Texas Secretary of State.
Included for this price is the drafting and filing of the Certificate of Formation, as well as the drafting of bylaws (corporation), company agreement (LLC), organizational minutes or unanimous consent, and templates for future years annual minutes or unanimous consents.
Additionally, we include a company records binder, company seal, and pre-printed stock (corp) or membership (LLC) certificates. If you prefer a different entity, we are also offering special pricing on partnerships (general, limited, and LLP).
Contact us today!