We live in a society where lawsuits are a fact of life, so it's prudent to protect yourself, your home, and your treasured belongings against someone going after your personal possessions and resources. As with corporations, a limited liability company (LLC) can limit your personal financial liability, protecting you from undue exposure.
With an LLC, you have the option of being taxed as a corporation or a partnership. Additionally, record-keeping and accounting are made easier by having a separate entity.
Legal Ace makes the process of forming an LLC quick, easy, and secure. We will guide you through a questionnaire, and then do the rest of the work for you -- quickly and efficiently.
I absolutely loved working with LegalACE to establish my LLC.
The entire process was very easy
to follow and far more user
friendly than some of the other
sites I looked into.
~ Jackie W. - Chandler, Arizona
All About LLC Formations
LegalACE education center provides you with the information and resources you need when
considering a LLC Formation. The LLC Formation Guide provides general information about LLC Formation, and the FAQs answer some of the most common questions people ask. This information
allows you to make informed decisions.
Limited Liability Companies or LLCs represent the business formation of choice for many looking
to carve out their piece of the American dream. These business formations offer the limited legal liability of a corporation with the simplicity and
flexibility of a partnership; that's why they are seen as hybrids of the two.
Like sole proprietorship or partnerships, LLCs may offer pass-through taxes, in which the owners
report the profits or losses on their personal tax returns. Due to their relative simplicity compared
with corporations, LLCs tend to be popular among companies with a single owner.
Limited Liability - With a sole proprietorship, the owners are personally liable for any debts and other obligations the
business incurs, and as a result, their personal assets are vulnerable. With an LLC, the owners
are not only protected from business debts, but also from legal liability, such as lawsuits against
the company.
No Double Taxation - LLCs have the option of being taxed
as a corporation or a partnership, depending on how they are
set up. LLCs can be set up to mimic the tax treatment of S
Corporations, in that earnings and losses flow through the
business to the owners, who then pay taxes on the earnings
through their personal income tax. Or they can be set up like a
corporation and taxed separately.
Tax Deductibility - Business owners will want to deduct as much of their expenses as possible, thereby reducing their overall tax payments. Why pay more taxes than necessary? The IRS specifically allows the deduction of reasonable and necessary business expenses. Many taxpayers overlook legitimate deductions for business expenses. To the extent possible, LLC owners will want to deduct the following types of business expenses: Vehicle expenses, travel expenses, start-up and organizational costs, entertainment expenses, legal fees, rent, materials and supplies, interest expense and bank charges, state local and sales taxes, salaries and other compensation for personal services, insurance, and advertising costs.
Piercing the Corporate Veil - Corporations and LLCs enjoy a veil of protection against law
suits and confiscation of personal assets to satisfy business debts, among other things. That
protection, however, is bestowed only to those businesses that can meet the criteria. In other
words, businesses cannot simply pose as corporations, go through the motions, and enjoy the
rewards of the business formation; they must look, act, feel and operate as limited liability
companies and corporations.
Corporations and LLCs must follow many rules on the road to the "veil of protection." Once the
owners start to slip, treating the business like a sole proprietor, mixing corporate and personal
funds, for example, they run the serious risk of losing its corporate status - or piercing the
corporate veil.
Here are some examples of behavior that has brought about civil cases against businesses that
are merely posing as LLCs and corporations - also called shell corporations:
Not filing or filing inaccurate corporate records;
Dishonesty or misrepresenting members;
Not maintaining arm's length relationships with related entities;
Not observing corporate formalities in terms of behavior and documentation;
Failure to pay dividends;
Intermingling assets from the corporation and the shareholder.
So, taking the step to creating a corporation or an LLC should not be taken lightly; it's a serious
endeavor with serious responsibilities. But with all great responsibilities come great rewards.
Creating your own LLC enables you to enjoy the benefits of owning a corporation along with the
simplicity of operating as a partnership. Having those LLC documents prepared by LegalACE
means you are receiving the best deal for your dollar and the most comprehensive customer support
in the industry.
A corporation is a legal business entity which is treated as an independent legal "person." In other words, a corporation is separate and distinct from its owners or shareholders. One may be an owner or a shareholder in a corporation. Shareholders exchange property, cash, or services for stock. Corporations limit the liability of owners or shareholders for the actions and debts of the corporation. A corporation has the ability to make contractual agreements, incur debts, and pay taxes. Corporations receive certain taxation benefits not shared by sole proprietorship's or partnerships. Corporations are categorized as S or C corporations depending upon their business structure.
Summary of Corporations:
. A corporation is considered a separate legal person
. A corporation can sell stock to shareholders to raise capital
. Corporations limit the liability of owners or shareholders
. Corporations can make contracts, incur debts, and pay taxes
. S corporations and C corporations are distinct business structures
Some of the important ways in which S corporations differ from C corporations regard methods of taxation and regulations pertaining to stock. An S corporation passes its income, losses, deductions and credit directly on to its shareholders. The flow-through of income and losses are reported on shareholders' personal tax returns. Therefore, an S corporation enjoys pass-through taxation, as it is only taxed at the level of its shareholders. Partnerships and other corporations may not be shareholders in an S corporation. S corporations cannot have more than 100 shareholders, and may only have one class of stock. C corporations' profits are taxed, and then taxed a second time when distributed to shareholders as dividends. Since corporations are not able to deduct the distribution of these dividends, they are taxed twice. This is referred to as double taxation. However, unlike S corporations, C corporations can have an unlimited number of shareholders and can sell different classes of stock.
The 3 main advantages of incorporating are limited liability, stock flexibility, and taxation.
Limited Liability
Limited liability protects the owners or shareholders of a corporation from personal liability for acts and business debts of the corporation. With a sole proprietorship, or partnership, the owners are personally liable for any debts and other obligations the business incurs. As a result, their personal assets are vulnerable. With a corporation the owners are not only protected from business debts, but also from losing their personal assets dues to litigation.
Stock Flexibility
C corporations can sell an unlimited number of stocks to an unlimited number of shareholders. Additionally, the stock can be of any class.This allows the corporation flexibility for raising capital.Corporations can also retain earnings (instead of distributing them as dividends to shareholders) and use them to re-invest or pay off debts etc. It is important to note that these rules do not apply to S corporations, as they are only allowed 100 shareholders and can only sell stock of one class.
Taxation
S corporations enjoy pass through taxation and do not face the double taxation of C corporations. Earnings and losses flow through the business to the owners or shareholders, who then pay taxes on the earnings through their personal income tax. In other words, shareholders are able to directly file S corporation income as individual income and pay a personal income tax rather than having the corporation taxed.
A C corporation is considered a separate taxpaying entity for business purposes. It is able to make the same tax deductions as other entities, as well as additional deductions. Corporations earnings are taxed to the corporation, and then taxed a second time when distributed as dividends to shareholders. Also known as "double taxation," C corporations cannot receive a tax deduction for shareholder dividends. In turn, shareholders may not deduct a loss of the corporation. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.
C and S corporations are allowed considerable tax deductions for business expenses. Business owners will want to deduct as much of their expenses as possible, thereby reducing their overall tax payments. The IRS specifically allows the deduction of reasonable and necessary business expenses. Many taxpayers overlook legitimate deductions for business expenses. To the extent possible, corporations will want to deduct the following types of business expenses: Vehicle expenses, travel expenses, start-up and organizational costs, entertainment expenses, legal fees, rent, materials and supplies, interest expense and bank charges, state local and sales taxes, salaries and other compensation for personal services, insurance, and advertising costs.
There are a number of requirements for corporations in order to continue to function as legal business entities. A Board of Directors, elected by shareholders, has comprehensive management responsibility while officers have day-to-day responsibility. Regular board meetings, the taking of corporate minutes, stockholder meetings, and annual report filing requirements are also typical. One should always consult the laws of the state in which your corporation is located in regards to the specific requirements for running a corporation.
There are a number of requirements for corporations in order to continue to function as legal business entities. A Board of Directors, elected by shareholders, has comprehensive management responsibility while officers have day-to-day responsibility. Regular board meetings, the taking of corporate minutes, stockholder meetings, and annual report filing requirements are also typical. One should always consult the laws of the state in which your corporation is located in regards to the specific requirements for running a corporation.
No, there is no minimum number of shareholders required. However, S corporation are allowed a maximum of 100 shareholders. C corporations have no maximum number of shareholders.
To determine the value of ones corporate shares, take the number of shares and divide that amount by the number of total shares. Next multiply that number by the total value of the company. For example, you might own 2 shares of a company worth $100,000.00. If a total 100 shares have been issued you should divide 2 by 100, and multiply that number by $100,000.00. Therefore, in this example your ownership is worth approximately $2,000.00.
(Note: This method does not apply to publicly traded corporations).
Generally speaking, your percentage of ownership is more important than the specific number of shares you own. For example, if you own 2 shares of a company that has issued 10 shares, you have 20% ownership of the company. If you own 500,000 shares of a company that has issued 10 million shares, you only have 5% ownership of the company. Therefore it is important to pay attention to your ownership percentage, and not simply the number of shares you own.
No. Insurance can be of great benefit; however, it is not a substitute for limited liability. Insurance does not protect against all risk. There is often a limit to the amount insurance will cover, and there are many third party claims that may not be covered. Insurance should be viewed as something to complement a proper business structure, not replace it.
No. Limited liability is not absolute for a corporation. If the owner(s) of a corporation engage in illegal or intentional misconduct they can be held personally liable. Below are some examples of instances in which a corporate owner could be held liable:
personally and directly injures someone
personally guarantees a bank loan or a business debt on which the corporation defaults
fails to deposit taxes withheld from employees' wages
intentionally does something fraudulent, illegal, or reckless that causes harm to the corporation or to someone else, or treats the corporation as an extension of his or her personal affairs, rather than as a separate legal entity
If the owner(s) of a corporation treats the corporation as an extension of his or her personal affairs he or she risks the existence of the corporation. A court can rule that a corporation is non-existent if the owner(s) seem to be conducting business as individuals. The owner(s) then become liable for their debts and actions. Often referred to as "piercing the corporate veil," a corporation can be stripped of its status as a legal business entity if it fails to meet certain requirements.
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