Saturday, April 25, 2009 WealthCounsel Nor-Cal ForumYesterday I met with some fellow WealthCounsel attorneys in Palo Alto to discuss advanced Wealth Transfer options for our clients. WealthCounsel is a collaborative organization of more than 1,000 law firms, WealthCounsel’s practice-building resources help attorneys efficiently draft sophisticated estate plans; gain competence through collegiality with other members; and learn new strategies to increase revenue opportunities. Friday, April 24, 2009 How to choose between California S-Corp and LLCSo you decided that you would like to protect your personal assets from that new or existing business you operate. But now you cannot decide between a corporation (most likely an S Corporation for smaller businesses) or a limited liability company.
Of course, once you choose a form of entity your work is not finished, as strict formalities are required and compliance is crucial to preserve any protection the entity provides. But the following advantages and disadvantages should help you decide. As always, you may want to consult an attorney to decide which factors are more important for your particular situation.
S Corporation Advantages
Shareholders enjoy limited liability. Ownership interests are freely transferable (subject to S Corporation restrictions). Existence unaffected by the death of shareholders or transfer of shares. Centralized management. Pass through tax treatment (as opposed to double taxation of C Corporations) Losses are available on the shareholders' personal income tax returns and can offset other income (subject to the "at risk" and passive loss rules).
Disadvantages: Formalities are required for organization and operation, more so than LLC Qualification is required for doing business in other states. Regular reporting is required. Strict qualification rules must be met on a continuing basis, which among other things limit the number and types of shareholders. The distribution of property by an S corporation to its shareholders is generally a taxable event for income tax purposes. Transfers of shares may be subject so securities regulations.
Limited Liability Company Advantages
Members enjoy limited liability. More flexible than S Corporations No limitation on the number or types of members. Centralized management is available if an LLC is manager managed. Assuming LLC is taxed as a partnership, pass through taxation. Losses are available on the members' personal income tax returns and can offset other income (subject to the "at risk" and passive loss rules). Special allocations may be made for income tax purposes. Disproportionate distributions may be made to members.
Disadvantages: Formalities are required however they are less onerous than S Corporations Regular reporting is required. Termination results from the death, disability, or withdrawal of a member under the laws of some states. Interests are not freely transferable. Business profits are taxed as income to the individual members and, as a result, may be subject to self-employment tax as well as income tax. Transfer of interests may be subject to securities law regulation. Wednesday, April 22, 2009 Why Should I Incorporate My Business?I get this question all the time from new business owners, friends and family.
Intro: Incorporation means taking your business to a new level that can provide numerous benefits. Essentially, when you incorporate a business, instead of remaining in a partnership or a sole proprietorship, you establish the business as an entity separate from you.As a corporation, you may get tax benefits, reduce your liability toward the business’ debts, be able to more appropriately value your company if you plan to sell it, and may be able to more effectively raise money.
Limited Liability: Typically, the number one reason for choosing incorporation is that it limits your personal liability. Provided you do not commit illegal or negligent acts while running the business, you are not staking your personal property if you find yourself with debts you can’t handle or a lawsuit that threatens your personal assets. Incorporation provides protection. People can sue your business, or they can attempt to collect debts from your business, but in most cases, whatever you personally own cannot be taken for debt collection or to pay off lawsuits. Since incorporation provides you with an entity, which is the business, many people like the feeling of asset protection. The business is not you, even if you run it, and therefore you are not in most cases liable if the business fails.
Tax Benefits: By establishing a business through incorporation, particularly a small to mid-size one, you may be eligible for a variety of tax breaks. These may not be the same or available to you if you run a non-incorporated business from your home or have a sole proprietorship. A good accountant can help you weigh which tax benefits might be available to you if you incorporate.
Group Rates / Plans: Further, a corporation, even a small one, may be eligible for cheaper rates on things like health insurance. With more and more states requiring that all full-time employees be insured, having corporation status may help ease the pain of high health insurance costs. When you have a public, for profit, corporation, one of the ways you can raise money is by selling shares. A single owner of a business does not have this money-raising potential. If you’ve got a great idea for a business, offering shares in your company allows for you to raise more money to fund your efforts. You can benefit not only yourself but investors in your corporation should your business become successful.
Exit Strategy: Selling your business is difficult to do without shareholders, since it may be hard to gauge the value of the business. An incorporated business tends to be easier to evaluate from a price standard, since you can not only show earnings, but also the investment opportunities and interest of shareholders. Generally, a business that incorporates may sell for a higher price than would a partnership or solely owned business.
Drawbacks: There are some disadvantages to incorporation. You’ll have to spend time to solicit and answer to shareholders, have a fully operational board of directors, and you’ll have less power in your company. In large very profitable businesses, sometimes people who originally started the business can lose their jobs as directors if the shareholders or board members vote them out. People who prefer to work alone, don’t hire employees, and don’t have significant assets outside the business may not want to go the incorporation route because to do so means they won’t have total control over their business. If you don’t play well with others, and don’t mind risking your assets, incorporation may not be right for you.
Call us to help you decide if it is in your bes interests to incorporate or form an LLC or other business structure. 408-957-0807 Tuesday, April 14, 2009 Taxes and your Family Owned BusinessThe SBA Office of Advocacy released a report where they examined the effective tax rates faced by small businesses. It found that the effective tax rate faced by small businesses varied by the form of organization of the company. The effective tax rate is calculated by totaling all income and dividing it by all taxes paid. So if your income was $100,000 and you paid $34,000 in taxes, total, your effective rate was 34%. Sole proprietorship's faced the lowest effective rate at 13.3%. Small business partnerships have an average effective tax rate of 23.6%, small S corporations have a rate of 26.9%. I think the numbers reveal a couple things. First, do not assume that choice of entity causes the different variation in rates. It's just that the distribution of the different form of entities follows a certain pattern. Sole proprietorship's tend to be smaller companies with less income, while larger enterprises tend to be partnerships and S corporations. The study just goes to show that progressivity in the tax code, at least in terms of small businesses, is alive and well. Sunday, April 12, 2009 Treating your LLC like an S-CorpYou are probably wondering, why would I want my limited liability company to elect to be treated as an S-Corporation? Wouldn't I be better off forming an S-Corp right from the beginning? The answer is, it depends.
LLCs are more flexible in regards to structure, and do carry less formalities when it comes to corporate governance. You still have to be compliant, or California may come after you, but for the most part less corporate governance and compliance is required. So why would you make the election to treat your LLC as an S-Corp? If you find the flexibility and ease of corporate governance for LLCs attractive, yet find that the tax advantages of S-Corps applies to your company, you can go ahead and combine the two.
Of course, you will still have to satisfy the requirements of S-Corporation: Domestic corporation or eligible domestic entity (LLCs are) No more than 100 shareholders Shareholders must be individuals, estates, certain trusts and exempt organizations No non-resident alien shareholders Only one class of shares Cannot be: A bank or thrift institution that uses the reserve method of accounting for bad debts under section 585, An insurance company subject to tax under subchapter L of the Code, A corporation that has elected to be treated as a possessions corporation under section 936, A domestic international sales corporation (DISC) or former DISC. Tax year ending 12/31, a natural business year, an ownership tax year, a tax year selected under section 444, 52-53 tax year based on any of the above, or any tax year for which the corporation establishes a business purpose Each shareholder consents in writing If you satisfy all these requirements, then you should look into possibly electing S Corporation treatment for your LLC, which is done by completing Form 2553 (Instructions) and possibly Form 8832. For California, you are no longer required to send in any forms to report, elect or terminate S corporation status. Federal S election and termination are binding for California. |