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Discussion Starter · #1 · (Edited)
Well, I started writing a thread to ask a question, and then I typed this... I hope this info is useful to someone. I'll ask my question below...

None of the below is legal advise, I don't really know that much, I just like to read... a lot....

Advantages of incorporating over a sole proprietorship or general partnership.

Limited Liability- With a SP, you (which includes your house, your boat, and your dog) are all at risk if you get sued. If you perhaps hired a felon and didn't do a background check, and that guy scares some lady, and then she sued, she could take all of your belongings. With a partnership, it is WORSE!!! You will not only be responsible for yourself, but also for your partner. And they don't have to run things by you. Scarily, you can start a business partnership with only a handshake. From then on, if your partner wants to obligate your company to $100,000 in debt, you are now locked in too. And worst of all, if your company gets sued, and your broke partner flees the state, the lawyers won't waste time tracking him down, they'll just go after whoever is easy to get to and has the deep pockets. Regardless of the fact that you didn't even know the debt was there and that your partner should be 50% responsible.

With any form of corporation, if ran correctly*, your personal assets should be protected. If you get sued, they might walk off with your screen printing equipment, but your 65" flatscreen gets to stay at home...

*Piercing the corporate veil- this term is used in reference to lawyers who can prove that you didn't run your business like a corporation. Examples would be mixing personal money with corporate money, or not having your annual board meeting (C&S Corps). At this point, you will be treated as a SP. So make sure to dot your i's and cross your t's.

Perpetual Existence- Long story short, when you die, your SP or partnership dies with you. Even if your kids have been working with you for 30 years, when you die, they have to start a new business. With a corporation, your business not only lives for as long as you can keep it going, but you can also slowly transfer assets to your children which can eventually lead to the transfer of millions of dollars in the company, without IRS taking away death taxes...

Money Stuff- A great title for this section. Basically, with a corporation you have many advantages monetarily. FOr instance, you can sell your corporation to someone else for a heap of money. With a SP or partnership you must sell each and every asset. Sure you can sell them all together, but the idea is that the other person needs to set up their own business, get their own bank accounts, and buy the assets. Whereas with a corp, you can sell all of those things in one neat package. It's also easier to raise capital because you can sell stocks (C&S corp), or shares in your business (LLC and LP) with a corporation.

Taxes- This section would be way too long if I were to really go through and talk about the tax advantages of incorporating. So I'll just mention two very awesome aspects about corporate taxation.

Tax free spending-
With a SP or partnership, you can deduct many things (though less than what a corp can deduct). One advantage with a corp is that you can spend money (on typically personal things) before you would pay taxes. A few examples are that you can give yourself a housing allowance, or "match funds" toward your retirement, or many other cool things like giving yourself awards. I don't want to mention too much, because I'm not a CPA. But for instance, on the retirement matching, just like HP or Microsoft would offer, your corporation can match any $ you put into a retirement fund. It then counts as a deduction for your company, but it also avoids the taxes it would see if you had been given that money. Self employment tax is like 15.3%... That's a huge hit...

Avoid certain taxes-
On the note of the 15.3% self employment tax, if you are a SP or partnership, you will pay this for all income you make. That's on top of income taxes and whatnot. If you have a S corp or C corp (or LLC opting to be taxed as a S corp) you can pay yourself via dividends vs a salary. Yes, you must pay yourself for your work, the IRS will not allow you to only receive dividends if you are working. But, if you pay yourself a small salary, you can pay the rest in dividend income, it is taxed less than an earned income (salary or wages) and it is not subject to self employment taxes, social security, medicare, etc...

Options for incorporating

Most of what I am going to quickly touch base on can be found on the chart on this page-

Business Entities - Forms Of Business Entities, Types Of Business Entities | Incorporate.com

C corps- These are the traditional big corporations. They have the most tax loopholes to work with. Realistically they are the way to go if you are planning to be a big roller someday. One problem is that they are taxed at the corporate level and then again with their shareholders. They are also paperwork heavy. Lots of things to file and rules to follow.

S Corps- Almost the same as a C corp. The differences are that there are some more restrictions, like limited stock holders, who the stock holders can be (only US citizens), among other things. The nice thing is that a S corp is a C corp, but they just filed a form to be a S corp. So, if you want to switch to a C corp, you just need to uncheck a box. Another nice thing is that they profits and losses pass straight down to shareholders. No double taxation. There are also fewer tax loopholes with the S corp.

LLC- These are relatively new. LLCs are taxed like a SP, but you can opt to be taxed like a S corp. They are very flexible and easier to run. Less red tape, no annual meetings required. You can also divide the ownership and profit sharing more easily. For instance, unlike a S or C corp where profits are shared exclusively by how much stock is held, you can make special arrangements as to who gets how much. So that way a 10% owner in the company could get 30% of the profits, if you saw fit (maybe he doesn't own much, but he contributed a lot of money.)

Limited Partnerships- These are another type of limited liability structure that I won't hit on too much. What I will say is that it is WAY more safe than a "general partnership" like I mentioned up top when referring to partnerships. These you can split up the ownership of the business and also choose who the decision makers are. You can also have the owners of it be other corps. One nice thing is that LPs offer a lot of protection when set up correctly.

I hope this helps, I still have my own questions for people who have been there. But the above is a good start.

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Discussion Starter · #2 ·
Alright, I too have questions. S corp vs LLC.

As you can see from my post above, I've got a good idea of the differences, in fact, much more than I wrote. I want to know what people think of LLCs vs S corps. I can obviously have my LLC taxed as an S corp. So that negates any tax differences. I don't see myself having many owners, unless I do it exclusively for more liability protection. I also know that LLCs are cheaper in some states than S cops, but more in other. I know LLCs are expensive in CA. I live in WA though...

So my pro/con list of LLC vs S corp-

LLC- Pro
*Less red tape and yearly paperwork (could = less $ on CPA fees)
*Double liability protection is possible
*Unlimited number of members
*Cannot lose my S corporation status for making a mistake in filing... Or least it isn't as strict as a real S corp.

*Cannot issue stock, only membership shares.
*Can't go public with stock.

S Corp- Pro
*Can issue stocks, though only to 100 members
*Can easily become a C corporation for more stock options and more tax loopholes.

*More red tape...
*Possibility of loses S corp status for not following proper protocol.
*Limited ownership (though I don't see this effecting me...)

More info can be found here- http://www.t-shirtforums.com/business-finance/t76788.html

One guy was supporting C corps, which is one reason I really like the S corp idea, I can let my losses flow through for the first few years and then eventually, if the tax benefits look good enough, I can easily become a C corp.

Anyone with personal experience want to chime in?

· Registered
9,952 Posts
Some of your information is wrong.

An LLC can have member distributions and the IRS has not decided if these are not subject to the 15.3% payroll tax. It is quite possible to take all profit from an LLC and have no payroll tax.

An LLC in CA is required to have an annual meeting.

C-corps are not paperwork heavy

You mention double taxation but don't explain it. Dividends do not reduce tax liability and the recipient is also taxed on the income, that is what is referred to as double taxation but it is not something to avoid a c-corp. You rightly observe that there are a number of tax free benefits that a c-corp can offer.

There is no such thing as a tax loophole. There are tax incentives built into the tax code. Jokingly speaking, it is a tax incentive when you can take advantage of it and a tax loophole when you cannot but someone else can. The incentives are designed to encourage a behavior and are often times exploited beyond the original intent, therefore being called a loophole. This is why the government should simplify the tax code and stop monkeying around with it.

After having a sole prop, LLC, and C-corp I would never do anything other than a C-Corp again.

A C-Corp can have
A tax year to end at the end of any month,
Retained earnings,
Unlimited cash and non-cash benefits that are not taxed,
Depreciation schedules (a c-corp is a recognized entity like a person)

For some great information on this, check out www.taxguru.org and blog.taxguru.net
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