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This section is designed to help you learn about the different kinds of business entities available. It will define and illustrate the advantages and disadvantages of sole proprietorships, partnerships, LLCs and corporations. Keep in mind that these are general overviews.
* Sole Proprietorship
* Partnership
* Limited Liability Company (LLC)
* C Corporation
* S Corporation
Sole Proprietorship
Sole proprietorships are often recommended by accountants and attorneys because of their simplicity. For example, from a tax standpoint, a sole proprietor does not have to file a separate business tax return. A Schedule C is attached to your 1040 and filed with the IRS. Gains and losses from the business are simply combined with other personal taxable items.
However, there are many issues to consider.
* With no legal distinction between yourself and your business, any business liabilities are also your personal liabilities. If you are sued, you may receive a judgment against your personal assets so you are risking everything you have for your business.
* A sole proprietorship can find it difficult to raise capital, since it can only be accomplished if you can qualify for a personal loan.
* Sole proprietorships have been historically limited in their ability to participate in such things as federally qualified pension plans and medical reimbursement plans that are available to other business entities.
Overall, sole proprietorships are risky entities that could cost you and your family all you own, especially considering that no other entity is more scrutinized by the IRS. As a result, the sole proprietorship is certainly not a long-term business solution. Consider the advantages of either a Nevada corporation or Nevada LLC by comparison - you may find that incorporating a business is a more suitable option depending upon your circumstances.
Advantages
* Ease of Formation
* Pass-Through Tax Treatment (i.e., Simplicity of Reporting)
Disadvantages
* Personal Liability
* Lack of Continuity
* Lack of Investment
General Partnership
This type of entity is formed when two or more people come together for the purpose of conducting a business. In forming a partnership, all partners must agree on which duties they will each take on and what percentage of ownership they will each hold. Typically this is done with a partnership agreement that should be put together by a lawyer.
Similar to sole proprietorships, partnerships have many of the same advantages and disadvantages. Like sole proprietorships, partnerships are easy to form, but they are taxed according to the tax levels of each partner. Likewise, no liability protection is offered. Again, businesses should seriously consider the consequences of litigation without any shield to protect the owners’ personal assets. Consider the advantages of either a Nevada corporation [link here] or Nevada LLC [link here] by comparison - you may find that incorporating a business is a more suitable option depending upon your circumstances.
Advantages
* Ease of Formation
* Pass-Through Tax Treatment (i.e., Simplicity of Reporting)
Disadvantages
* Personal Liability
* Lack of Continuity
* Lack of Investment Flexibility
Limited Partnership
Limited partnerships are composed of a minimum of two types of participants: general partners and limited partners. General partners accept the responsibility for and take all the risks involved in managing and conducting the business. Limited partners, on the other hand, are investors who share some risk, depending on the amount invested, but who have no participation in the actual management of the entity. Limited partners simply enjoy the profits, and share in the losses, on the basis of what is stipulated in the partnership agreement. These provisions provide limited liability protection, but they do not allow any privacy for the parties involved. Limited partnerships are often used for estate planning purposes. These vehicles allow individuals to control their assets, while still having the ability to pass ownership of those assets along to their heirs.
Advantages
* Pass-Through Tax Treatment (e.g., Simplicity of Reporting)
* Financial Flexibility
* IRS Discounting upon Death (e.g., Lower Estate Taxes)
Disadvantages
* Liability of the General Partner(s)
* Lack of Control for the Limited Partners
* Lack of Investment Flexibility
Consider the advantages of either a Nevada corporation or Nevada LLC by comparison.
Limited Liability Company
The limited liability company (LLC) is a unique form of business that blends the characteristics of corporations, partnerships and sole proprietorships into a simple and flexible business entity that many small business owners prefer. Why?
Asset Protection - In today’s ‘lawsuit-happy’ environment, it’s more important than ever to put a legal shield between you and your creditors. As a completely separate entity, LLCs separate the owners from the business itself. There is no personal liability for any LLC debts even if they relate to a contract or tort. The operating agreement can, for the most part, contain any procedures and rules that the parties desire and once put in place can just sit there maintenance-free. The initial drafting of the operating agreement is very important because it must comply with state and IRS regulations so that the LLC will be taxed as a partnership and not as a corporation.
Tax Advantages - An LLC legally separates the business from its owners (like a corporation), yet it can elect to be treated as a partnership for tax purposes. In this case, the LLC doesn't pay any tax itself - the income is passed through to the owners as with partnerships. The tax rules governing partnerships are more flexible, allowing for more flexibility in tax planning. It is up to you to be creative and take advantage of every possible tax break you qualify for. Your specific situation will dictate whether an LLC or a corporation offers the best tax advantages for you.
Ability to Raise Capital - When you start an LLC, it is simple to bring new owners (called members) on board, and there is no limit as to how many can be involved. These additional investors can be individuals, corporations, trusts, and pension plans, none of which even have to be in the same state or in the U.S. (Of course, you can form either a Nevada LLC or a Nevada corporation in this pro-business state without ever setting foot here!)
Easy to Run - The LLC entity was formed around the principle of the freedom to contract. This basically means the owners only have to agree among themselves how the company will be run and the agreement will be held up in court. As an LLC, resolutions, amendments, meeting minutes, and annual board meetings are not required by law, as they are with corporations. In fact, in most states, owners of corporations that do not comply with these requirements lose the asset and liability protection typically provided by a corporate entity. Nevada, though, is unusual in that the corporate veil* can only be pierced in the case of fraud, even if these corporate formalities are not performed. Again, your specific situation will dictate whether a Nevada LLC or a Nevada corporation will work best for you. For when an LLC is most appropriate click here.
Don’t wait to take advantage of the protections the law affords you and your business. No matter what business entity you choose, it needs to be for the right reasons. Let us help you decide which business entity is right for you. Call Nevada Corporate Headquarters today: 1-800-508-1729
Limited Liability Company
The LLC entity can be used to hold property and transact any type of business. LLC entities are similar to partnerships, limited partnerships, S corporations, and trusts. An LLC is a flow-through entity. It passes all of the LLC profits and losses directly to the members of the LLC. Individual members are therefore taxed at their personal tax rates.
LLCs are owned by members, which are like shareholders in a corporation. Unlike S corporations, which are limited to 75 shareholders, the LLC can have an unlimited amount of members. A member's ownership interest in the LLC is referred to as a 'membership interest'. It is like stock in a corporation. All members of an LLC can manage the business; management can also be delegated to fewer than all members or to a single manager. A manager can be an individual, a partnership, a corporation, or, in some states, such as Nevada, even another LLC. This offers tremendous flexibility for estate planning and asset protection.
This is not to say that building business credit cannot be accomplished with a sole proprietorship or partnership. At Nevada Corporate Headquarters Inc. we will work you to build credit, no matter which entity you choose.
Disadvantages
* Federal Security Limitations: The LLC is only available to privately owned companies. If a company were to go public, it would have to be a C corporation. With merger laws, it would be relatively easy to convert a Nevada LLC to a C corporation.
* Loss of Pass-Through Tax Treatment: This occurs when an LLC is viewed as a corporation, which happens when there is an election filed with the IRS and the LLC qualifies for three of the four criteria that define a corporation. If it is taxed as a partnership, pass-through treatment still applies for taxes.
* State Tax Treatment: Some states impose an income or franchise tax; however there is neither on a Nevada LLC.
Corporation
One of the most consistently dynamic business entities is the corporation. Offering tremendous flexibility and advantages that generally outweigh all other business entities, the corporation is the most secure entity in business. Because a corporation is considered a 'person' with rights of its own under the law, a stockholder (owner or partial owner) is a holder of shares of stock in the corporation and is NOT IN LEGAL DANGER for the acts of the corporation. In other words, you, as the owner, are not responsible. You are not the employer of those working for the corporation nor are you the owner of corporate property. In addition, a corporation is a citizen in the state wherein it was created and does not cease to be a citizen of its state of domicile by engaging in business or acquiring property in another state.
The important point to remember is that, when you own a corporation, it exists as a completely separate entity or ‘person’. You can live anywhere you choose because it is the corporation's 'state of residence' that dictates the requirements. You will find that a Nevada corporation provides the greatest benefits for protecting you and your business.
But it doesn't end there; corporations vary in their formation and organization. You will need to select from various types. The two typical corporations that most CPA's or attorneys will recommend are S and C corporations. In explaining the differences between S and C corporations, one should keep in mind that every state has different laws for corporations. What an accountant may tell someone in California may not be true in Nevada.
C Corporation
* Allows for limited liability of the owners/officers/directors.
* Runs on a fiscal year, which may be designated by the board of directors, rather than on a calendar year.
* Nevada does not require corporate owners to be on record- protecting your identity.
* Profits are taxed at corporate rates on an 1120 return separate from the individual return.
* Profits can be kept as retained earnings.
C corporations offer more protection and options for business owners in almost every case;
* In almost every category, C corporations will pay less in tax than an individual. The C corporation tax table is the only one in which the tax rate drops when you start making millions. That's why every Fortune 500 company is a C corporation.
* C corporations have no limitations on shareholders. Shareholders can live anywhere in the world and can be any type of entity.
* There are far fewer criteria for a C corporation, as compared with an S corporation, so you have the options you need to meet your objectives.
C corporations will give you the most flexibility, which is why Nevada Corporate Headquarters Inc., recommends them in most instances. For when C corporations are most appropriate click here.
S Corporation
S corporation is a good option if you are incorporating a small business.
1. Allows for limited liability of the owners/officers/directors.
2. Typically runs on a calendar year.
3. Full disclosure of corporate owners.
4. Profits pass through to the individual tax return 1040. No tax brackets separate from the personal tax brackets apply.
5. All profits are taxed even if not distributed.
State taxes will apply for individuals who are located in a state with an individual state tax. Nevada has no state corporate tax of any kind.
There are certain qualifications that the corporation must meet in order to elect S corporation status. To elect S corporation status, your corporation must meet all of the following requirements.
* It must be a domestic corporation formed in the U.S.A.
* It may have no more than 75 shareholders.
* It may only have individuals, estates or certain trusts as shareholders.
* It may not have non-resident alien shareholders.
* It may only have one class of stock.
* It must be a small business corporation (financial institutions, such as banks, insurance companies, building and loan associations or mutual savings and loan associations, cannot take advantage of an S corporation election).
* It must conform to state statutory restrictions, which limit the transfer of shares/ownership of the company.
Comparison of C Corporations & S Corporations
Corporations vary in their formation and organization. A corporation is not just a corporation. You will need to select from various types. The two typical corporations that most CPA's or attorneys will recommend are S and C corporations. In explaining the differences between S and C corporations, one should keep in mind that every state has different laws for corporations. What an accountant may tell someone in California may not be true in Nevada.
S Corporation
* Allows for limited liability of the owners/officers/directors.
* Typically runs on a calendar year.
* Full disclosure of corporate owners.
* Profits pass through to the individual tax return 1040. No tax brackets separate from the personal tax brackets apply.
* All profits are taxed even if not distributed.
* State taxes will apply for individuals who are located in a state with an individual state tax.
C Corporation
* Allows for limited liability of the owners/officers/directors.
* Runs on a fiscal year, which may be designated by the board of directors, rather than on a calendar year.
* Nevada requires no disclosure of corporate owners.
* Profits are taxed at corporate rates on an 1120 return separate from the individual return.
* Profits can be kept as retained earnings.
* Nevada has no state corporate tax of any kind.
C corporation status is appropriate for:
* When owners live outside the country
* When owners live in a state with a state income tax
* When several individuals or other entities are involved in ownership
* When sales are greater than $60,000 per year.
S corporation status is appropriate for:
* Companies expecting start-up losses during the initial years of operation.
* Companies with no intent of going public in the future.
* Companies that do not expect to issue multiple classes of stock.
* Companies that might be subject to the Alternative Minimum Tax.
* Owners live in a state with no personal state income tax.
* Sales are less than $250,000 per year.
LLC status is appropriate for:
* When the business is a partnership
* When real estate is owned for investment purposes
* When several entities own the business
* When the owner is seeking complete protection from personal liability
The best entity for building business credit for your company is one that will:
* Separate you from your business
* Have its own federal tax identification number
* Separate your company's business debt from owners/officers
The business entities that provide these are the following:
* S Corporation
* C Corporation
* Limited Liability Company (LLC)
While these are favorable business entities, there are benefits to the sole proprietorship and limited partnership business entities. At Nevada Corporate Headquarters Inc., we will work with you no matter which entity you choose.
