Choosing the Appropriate Entity
Specializing in Mergers and Acquisitions, Entity Formation, Business Contracts, Entity Reorganization, Capital Formation and Business Tax Planning.
Putting each piece of the entity puzzle in the right place is important in selecting the best business entity. This brochure provides a brief overview of the basic issues and facts regarding selection of the appropriate business entity. Why incorporate? Should your company be a corporation, limited liability company or a limited partnership? If you incorporate, should you elect Subchapter “S” status? What does “limited liability” really mean? Will the form of entity that looks best today be the best entity for the future?
The materials in this brochure are excerpts from materials used by Mr. Neu in advising clients on how to organize or reorganize their business. This brochure should not be relied upon as rendering legal advice.
The goal is to achieve “limited liability” without adverse tax consequences. Limited Partnerships, Corporations and Limited Liability Companies provide “limited liability.” Owners, however, cannot escape total liability as noted below.
“C” Corporation Advantages
- Owners can deduct:
- Health insurance premiums.
- Medical reimbursement costs.
- Premiums on up to $50,000 term life insurance.
- Pension plan:
- Owners can borrow from the plan.
- Easier to qualify for lump-sum distribution.
- 50% of gain excluded on sale of “qualified small business stock.”
“C” Corporation Disadvantages
- Avoiding double taxation by “zeroing out” the corporate income by paying salaries to the active owners will not be acceptable to non-salaried / passive owners and may result in “unreasonable compensation.”
- When the business is sold, an asset sale (versus a stock sale) could result in “double taxation.”
Subchapter “S” Corporation Restrictions & Conditions
- “S” corp. can not have more than 75 shareholders.
- Only natural citizens that are U.S. citizens or resident aliens (except certain qualified estates and trusts) may be shareholders.
- Must ordinarily adopt a calendar year.
- “S” corp. can not have more than one class of stock.
(1) California “S” corporations are subject to a 1.5% state income tax and LLC’s pay $800 per year plus a fee based on gross sales. The fee starts at $500 on gross sales from $250,000 to $500,000 and increases to $4,500 if gross sales are equal to or greater than $5,000,000.
Limited Liability Companies
Many private companies will find that the Limited Liability Company provides alternatives and flexibility that cannot be obtained in an “S” corporation. The scale sets forth the advantages and disadvantages of an LLC versus an “S” corporation. The size of each box indicates each item¹s relative importance, however, the facts of each case will have a significant impact on the final analysis.
Forming the right kind of business entity will help provide a solid foundation to achieve lasting financial benefits.