Business Entity FAQ's
Special Offer on LLC formation:
Express LLC
Common issues regarding “choice of entity” are:
- Ownership
- Control and Management
- Taxation
- Asset and Creditor Protection
- Business Succession
Important things to remember:
- Consult a CPA on tax issues related to your business (self-employment taxes, fringe benefits, deductions, etc.)
- Once formed, you must transfer business assets to the entity, otherwise the entity can’t help protect them
- You must represent yourself in the world as your chosen business entity, for example - business cards, letterhead, websites, contracts, invoices, etc.
- Don’t commingle business funds or assets with personal funds or assets
- Insure your business and its assets properly
- Check on necessary permits, licenses, etc.
- Prepare and file tax returns on a timely basis
- Prepare and file annual reports (corporation and LLP) on a timely basis
- Maintain a current address and statutory agent with the Arizona Corporation Commission or Secretary of State as appropriate
- Consider, prepare and plan for the worst case scenario:
- What if my partner jumps ship?
- What if my partner dies?
- If I die, can the business succeed without me?
TYPES:
· Sole Proprietorship
· General Partnership
· Limited Partnership
· Limited Liability Partnership (LLP)
· Corporations - Generally
· “C”Corporation (C Corp)
· “S”Corporation (S Corp – Sub S Corp – Subchapter S Corp)
· Professional Corporation (PC)
· Limited Liability Company (LLC – limited liability corporation)
· Professional Limited Liability Company (PLLC)
Sole Proprietorship
Advantages:
- Simple to establish and operate
- Only one owner
- Easy to sell assets
- Total control of business
- Owner pays all taxes – simple taxation
Disadvantages:
- Unlimited personal liability of owner
- Business assets not protected from personal creditors
- Business capital limited to personal assets or personal loans
- Business lacks credibility
- Terminates automatically at death
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General Partnership
Advantages:
- Simple to form
- Partnership relations governed as agreed by partners
- Partnership income divided as agreed
- Partnership income taxed to partners individually (pass-through taxation)
- Partnership assets protected from personal creditors
- Less administrative burdens than corporations
Disadvantages:
- Each partner liable for all partnership debts
- Community property of partner’s spouse at risk
- Divided decision-making means no centralized management unless written partnership agreement is in place
- Each partner can bind the other partners
- Difficult to raise additional capital
- Transfer of partnership interest subject to approval of all other partners
- Terminates on death of any partner unless all others agree to continue business
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Limited Partnership
Advantages:
- Simple to form
- Only General Partners (GP) have control – centralized management and decision-making
- Limited Partners (LP) get liability protection
- Partnership income taxed to partners individually (pass-through taxation)
- Partnership assets protected from personal creditors
- Easy to attract capital through LP interests
- Partnership continues after death of a partner
Disadvantages:
- GP has unlimited liability for all partnership debts
- Restrictions on transfer of LP interests
- LP interests are often illiquid
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Limited Liability Partnership
Advantages:
- Same as a General Partnership
- PLUS all partners have limited liability protection from creditors of partnership
Disadvantages:
- Same as General Partnership (except that liability is now limited)
- Rules and laws of LLP’s are new and untested
- Not recognized in all states (may then be treated as a General Partnership)
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Corporations - Generally
Advantages:
- Centralized management (elected officers)
- Liability protection for owners (shareholders)
- Corporation’s assets protected from creditors of shareholders
- Free transferability of shares unless restricted by agreement
- Easier to raise capital through sale of shares
- Perpetual life
Disadvantages:
- Not as easy to form as other entities
- Statutory formalities must be observed
- Distributions taxed as dividends
- Subject to double taxation (“C” corporation)
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“C” Corporations
Advantages:
- No restrictions on type or number of shareholders
- Can create different classes of shares and different rights of shareholders are allowed
- Fringe benefits to owner/employees can be tax deductible
- Flexible retirement planning options
Disadvantages:
- More difficult to form
- Statutory formalities must be observed
- More administrative burdens
- Subject to double taxation (no pass-through)
- Cannot pass losses through to shareholders
- Dissolution or sale triggers taxable gains
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“S” Corporation
Advantages:
- No double taxation – pass through taxation to shareholders
- Tax rates may be lower
Disadvantages:
- Limitations on type and number of shareholders
- Only one class of stock allowed
- Subchapter S election fragile
- All income taxed even if not distributed
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Professional Corporation
Advantages:
- Can be either a “C” or an “S” corporation
Disadvantages:
- Majority shareholders must be professionally licensed
- Limitations on who can purchase
- No limited liability for professional services
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Limited Liability Company (LLC)
Advantages:
- Simpler to form and maintain
- May have centralized management if desired
- All owners (members) have liability protection from LLC’s creditors
- LLC assets protected from creditors of members
- No limits on type or number of members
- Capital can come from members or outside sources – sale of member interests
- Does not terminate on death of member
- LLC can elect pass-through taxation (partnership) or corporate taxation (C or S)
- Can exist as single-member or multiple member
- Single member = no separate tax return
- Operating Agreement offers great flexibility on management, transferability, etc.
Disadvantages:
- Usually cannot go public – must convert to “C” corporation first
- Distributions to managing members may be subject to self-employment taxes
- Single member LLC’s sometimes treated differently in different states
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Professional Limited Liability Company
Advantages:
- Simpler to form and maintain
- May have centralized management if desired
- All owners (members) have liability protection from LLC’s creditors
- LLC assets protected from creditors of member
- Does not terminate on death of member
- LLC can elect pass-through taxation (partnership) or corporate taxation (C or S)
- Can exist as single-member or multiple member
- Single member = no separate tax return
- Operating Agreement offers great flexibility on management, transferability, etc.
Disadvantages:
- Majority members must be professionally licensed
- Distributions to managing members may be subject to self-employment taxes
- Single member LLC’s sometimes treated differently in different states
- More difficult to form and maintain
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