Why would I conduct my business as a corporation?
The primary reason people choose to conduct business as a corporation is the benefit of limiting liability to only the assets invested in the corporation. Generally, your personal assets are protected from the general obligations due the creditors of the corporation. This rule is not absolute, however. There are instances in which you can be held personally liable for the debts of the corporation. For example, certain tax obligations of the corporation can be satisfied by the personal assets of the shareholders. By the way, this is true of all business entities i.e. LLC, LLP etc. You can't run from certain types of taxes.
What's the difference between an S-corporation and a C-corporation?
All corporations start out as C-Corporations. The S-corporation is a C-corporation that has made an affirmative election to be taxed like a partnership. From that point forward it is referred to as an S-corporation. The designation as to C-corporation or S-corporation is simply the result of the way the corporation has been set up for tax purposes.
Why would I want to be an S-corporation?
The Primary reason people elect S-corporation status is to position the company to take advantage of the tax benefits associated with S-corporations. With limitations, the shareholders of an S-corporation can take losses against their personal income. This is particularly true of a start-up company which is more likely to incur losses in the earlier years.
Can I elect S-Corporation status any time I desire?
No. There is a limited window of opportunity to elect S-corporation status. Generally you have until the 15th day of the third month after the corporation comes into existence. If you miss the deadline, the window re-opens at the start of the next fiscal year. This rule is strictly enforced by the IRS and States.
What are some of the other technical issues is should know about S-corporations?
- Limited to 100 shareholders.
- Non resident aliens are not permitted to be shareholders.
- All shareholders must consent to the election.
- Only one class of stock is allowed.
- Generally must maintain a calendar fiscal year for tax purposes.
- The corporation's income and deductions pass through to the shareholders. The shareholders then must report the income and deductions on their own income tax returns.
- The corporation may have as shareholders only individuals, estates, certain trusts, banks, and certain exempt organizations. Partnerships and corporations cannot be shareholders.
What is a Federal Employer Identification Number (FEIN)?
This is a tax identification number assigned to your business. It is similar to a social security number for your business.
Do I really need a Federal Employer Identification Number (FEIN)?
Yes. Without it you won't be able to open a business checking account. The FEIN is requested for use in many government applications and registrations. Your FEIN should be obtained immediately upon the formation of your business.
Why would I conduct my business as a Limited Liability company (LLC)?
The primary reason people choose to conduct business as an LLC is to get the benefit of limiting personal liability to only the assets invested in the LLC. Generally, your personal assets are protected from the general obligations due the creditors of the LLC. This rule is not absolute, however. There are instances in which you can be held personally liable for the debts of the LLC. For example, certain tax obligations of the LLC can be satisfied by the personal assets of the members. By the way, this is true of all business entities i.e. Corporation, LLP etc. You can't run from certain types of taxes.
What is a Limited Partnership (LP)?
This is a partnership with two types of partners. One is the Limited Partner the other is the General Partner. This type of entity provides the benefits of limited liability to the Limited Partners only. The General Partners are personally on the hook for the obligations of the partnership. The General Partners are responsible for the management of the business. Whereas, the Limited Partners are simply investors not permitted to participate in the management of the business. If the limited Partners were to violate this rule, they would be considered General Partners and consequently forfeit the limited liability they have enjoyed until that point.
What is a Limited Liability Partnership (LLP)?
This is a partnership that provides the benefits of limited liability to all the partners. Unlike a Limited Partnership (LP), there is no distinction between the Limited Partners and the General Partners. LLP's are popular with professionals, i.e. Doctors, Accountants, Architects, Lawyers etc. Generally, your personal assets are protected from the general obligations due the creditors of the LLP. This rule is not absolute, however. There are instances in which you can be held personally liable for the debts of the LLP. For example, certain tax obligations of the LLP can be satisfied by the personal assets of the partners. By the way, this is true of all business entities i.e. Corporation, LLC, LP etc. You can't run from certain types of taxes. In addition most state hold professionals personally responsible for their own acts of misconduct or negligence. Most state will hold harmless partners not responsible for acts of misconduct or negligence by another partner.
What tax responsibilities do I have when I employ people?
Employers who pay wages to employees must deduct and withhold federal and in most cases state income taxes. These withheld taxes must be paid to the federal and state government. They also must withhold and deposit social security (FICA) and pay a matching amount of FICA taxes. Employers also must pay federal unemployment (FUTA) and in many cases state unemployment taxes on wages paid to employees. Taxpayers that have employees must file a variety of forms and reports, such as Form 941, Forms W-2 and W-3, Form 940 or 940EZ in addition to various state reports.
Do I have to put my employees on payroll or could I treat them as independent contractors and avoid the taxes?
I can't count the number of times this question has come up. The answer is; it depends. Generally the more control you exercise over the individual the more likely they are not an independent contractor. Historically the IRS has taken a cynical view when reviewing cases involving this issue. It has been the experience of this firm that this issue has been abused and exploited. The IRS makes the determination on a case-by-case basis.
It is the opinion of this firm that you should take a very conservative approach when trying to classify someone as an independent contractor.