A Santa Cruz Corporate and Business Law Attorney Explains Different Business Structures
When a new business owner is trying to decide between the various legal entities under which to structure their company, a Santa Cruz corporate and business law attorney will often help them determine whether an LLC, corporation or S-corporation is most appropriate for their business. Each different type of business entity has different tax and documentation requirements. If you are trying to determine which structure to choose, a Santa Cruz corporate and business law attorney may be able to provide you with guidance. Here is a general overview of these three legal entities.
When an LLC Might Make the Most Sense
For many small businesses, the flexibility allowed by an LLC, or limited liability company, makes it the best type of structure to choose. If your business owns real property that could increase in value, an LLC may make the most sense. Corporations face double taxation on the increase. Both the corporation is taxed for it as are the individual shareholders in the company. In an LLC, the individual owners are called members of the LLC. The profits from the business pass through to them, meaning they are not subjected to the double-taxation. An LLC also limits the personal liability of the owners of the business, meaning that if the company is sued, their personal assets cannot be seized in order to satisfy any resulting judgment. A Santa Cruz corporate and business law attorney can advise you on whether an LLC is the best structure for your company.
When a Corporation Might Make the Most Sense
Even though an LLC is often a good choice, there are several reasons that a traditional corporation may be a better choice in the event certain factors exist for your company. If any of the following apply, a traditional corporation may be a better choice for you:
- You plan to try to raise money through the public or to have several investors in your company. An LLC can work very well when there are a limited number of people who have invested in the business. If you have multiple investors, however, several problems can arise if your chosen structure is an LLC. In many cases, investors who are not directly involved in the day-to-day operation of your business will want to have tangible proof of their partial share through a stock certificate. An LLC cannot issue stock certificates, and you may thus run into problems from those investors. To avoid it, a corporation would probably make more sense.
- Your company will pay several fringe benefits to the owners. With a corporation, you can do things like pay an owner a tax-deductible salary because the owner is considered to be an employee of the corporate entity. Other fringe benefits that can also be paid through the corporation include such things as health insurance and medical expense reimbursements. When you have an LLC, many fringe benefits do not receive favorable treatment under the tax law, and only a part of medical insurance premium payments can be deducted. A corporation, on the other hand, can deduct these as expenses, and the IRS will not treat these benefits as taxable to the employees receiving them.
- Your company wants to recruit talent by offering stock bonuses and options. LLCs are not allowed to issue stocks, while corporations are allowed to do so. If you want to recruit talent via offering them stock options and bonuses, an LLC will not be a good choice for your structure.
When an S-Corporation Might Make the Most Sense
Your Santa Cruz corporate and business law attorney may advise you to choose an S-corporation instead of an LLC for your legal entity structure. S-corporations allow business owners to pay self-employment taxes on the compensation received but not on the business’s profits that pass through to them. For LLCs, the entire amount is taxable at 15.3 percent. This means LLC owners may end up being required to pay a larger share in taxes than S-corporation shareholders. For tax year 2015, employers are required to withhold 7.65 percent for Social Security and Medicare from the initial $118,000 made in the year. They must additionally withhold 1.45 percent for Medicare for amounts above that. Finally, the employer has to match those amounts for a total of 15.3 percent of the entire amount plus 2.9 percent above earnings of $118,000. This means that if you are a shareholder in an S-corporation, you will be taxed at 15.3 percent for your compensation. You will not be taxed that for profits that have passed through to you, though, such as the reasonable value of your services to the company.
Proposed IRS Regulations
Your Santa Cruz corporate and business law attorney will also explain pending regulations that could affect the tax treatment for IRS and their implications. Although these regulations have been placed on hold by Congress, they still should be considered, as they could mean that the entire profit for an LLC could be taxed to the owner in certain situations. These include if the LLC owner works in the business in excess of 500 hours in a tax year, if the owner is providing professional services in the areas of law, healthcare, architecture, engineering, accounting, consulting or actuarial science, regardless of the number of hours worked, or if the owner has the power to sign contracts for the LLC.
Contact a Santa Cruz Corporate and Business Law Attorney
When you are starting a new business, choosing the right type of structure for your company’s needs can be vital for your overall success. An attorney may be able to review your goals and wants to better advise you as to the structure that will result in the most tax advantages and the biggest benefits to encourage your company’s growth. To contact a Santa Cruz corporate and business law attorney at The Freed Law Firm, call (831) 661-0300.