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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.
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.
Advantages
Limited Liability
No Double Taxation
Tax Deductibility
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.
Corporate Comparison Chart
Summary
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.
An LLC, or Limited Liability Company, is a legal business structure which limits the personal liability of its owners for the debts and actions of the LLC. While an LLC is a unique business structure, it shares certain characteristics common to corporations, sole proprietorships, and partnerships. LLCs provide the owner(s) with multiple benefits, such as management flexibility and pass through taxation, while retaining the full limited liability previously enjoyed only by corporations. If you are interested in forming a business, an LLC may be the most efficient, affordable, and secure choice.
An LLC may have one or more owners, who are referred to as members. Initially some states required LLCs to have more then one owner. Now many states allow a single owner to acquire an LLC. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs, and foreign entities. There is no maximum number of members for an LLC.
The LLC functions best as a small business, requiring less organization and oversight than a large corporation. As a separate legal entity, the LLC must have its own bank account through which all income and expenses must flow. The LLC conducts all business in its name, and its members act as authorized agents on behalf of the company. Just as shareholders of a corporation are insulated from liabilities of the corporation, LLC members are protected from liabilities of the company.
An LLC has qualities similar to those of C and S Corps. It is important to understand the difference between the various kinds of corporate entities as illustrated below:
Administration Requirements
LLC - Relatively few requirements.
C Corp - Election of board of directors/officers, annual meetings, and annual report filing requirements.
S Corp - Election of board of directors/officers, annual meetings, and annual report filing requirements.
Management
LLC - Members can set up structure as they choose.
C Corp - Shareholders elect directors who manage business activities.
S Corp - Shareholders elect directors who manage business activities.
Term
LLC - Perpetual, unless state requires fixed amount of time.
C Corp - Perpetual: can extend past death or withdrawal of shareholders.
S Corp - Perpetual: can extend past death or withdrawal of shareholders.
Double Taxation
LLC - No
C Corp - Yes, taxed at corporate level and then again if distributed to shareholders in the form of dividends.
S Corp - No
Pass Through Tax Treatment
LLC - Yes
C Corp - No
S Corp - Yes
Ownership Rules
LLC - Unlimited number of members allowed.
C Corp - Unlimited number of shareholders; no limit on stock classes.
S Corp - Up to 100 shareholders; only one class of stock allowed.
Ease of Operation
LLC - Easy, some states may require more than others.
C Corp - Must have annual meetings, Board of Directors meetings, corporate minutes, and stockholder meetings.
S Corp - Must have annual meetings, Board of Directors meetings, corporate minutes, and stockholder meetings.
The 3 main advantages of an LLC are limited liability, taxation, and management flexibility.
Limited Liability
Limited liability - The owners of the LLC, called "members," are protected from personal liability for acts and business debts of the LLC. 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 an LLC the owners are not only protected from business debts, but also from losing their personal assets dues to litigation.
Taxation: No Double Taxation, flow-through tax advantages, tax deductibility
Pass-through taxation - Under the default tax classification, profits are taxed at the member level, not at the LLC level (i.e., no double taxation). LLCs have the option of being taxed as a corporation or as a partnership, depending on how they are structured. 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. LLCs can also be set up like C corporations and be taxed separately.
Tax Deductibility - 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, 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.
Management flexibility
Simplicity of operation with much less administrative paperwork and recordkeeping.
LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owner(s), thus avoiding problematic business termination or sole proprietor death.
No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board or similar body).
Flexible distribution of profits and losses.
Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (i.e., See VA and Delaware LLC Acts).
No. Limited liability is not absolute, for either LLC's or corporations. If an LLC owner engages in illegal or intentional misconduct they can be held personally liable. Below are some examples of instances in which an LLC owner could be held liable:
. Personally and directly injures someone
. Personally guarantees a bank loan or a business debt on which the LLC defaults
. Fails to deposit taxes withheld from employees' wages
. Intentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else, or treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.
If the owner of an LLC treats the company as an extension of his or her personal affairs he or she risks the existence of the LLC. A court can rule that an LLC is non-existent if the owners seem to be conducting business as individuals. The owners then become liable for their debts and actions. Often referred to as "piercing the corporate veil," an LLC or corporation can be stripped of its status as a legal business entity if it fails to meet certain requirements.
Although the requirements are similar, there is generally more administration overhead required for a corporation than for an LLC. For example, corporations must have board elections, keep corporate minutes, hold annual meetings, and report filings. While LLC's are required to file certain documents and keep proper records, they generally require less paperwork.
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.
It is not always advantageous to form an out-of-state LLC. Some business owners choose to form an out-of-state company in order to maintain anonymity. Often out-of-state LLCs are formed as a method of avoiding state income taxes. Regardless of where the business is formed, you are required to pay the state income taxes of the state in which the business is located. Sometimes a business owner will have to pay fees in both the state of incorporation as well as the state of the business. For this reason, forming an out-of-state entity can lead to double costs.
Entrepreneur Charles Ferraro wanted to develop a chain of three big and tall men’s clothing shops in El Paso. First, he formed an LLC under his name: Charles Ferraro LLC. He opened his first store under the DBA – or Doing Business As –Big Chuck’s Smile and Style. He opened his second shop on the other side of town under the DBA Haberdashery by Charles, and then the third shop two years later under the DBA Vestidos Para Hombres Grandes.
DBAs are legal filings that enable business owners to name their businesses something other than their legal company name, save money and keep their business formations simple. By creating one corporation or LLC, rather than three, as Ferraro did in the example above, he was able to expand his business simply and inexpensively.
“DBAs offer business owners a fantastic tool to multiply your business reach without over-complicating your business structure,” said Adam Pollicino, Chief Operating Officer with LegalACE, an online document preparation company based in Scottsdale, Ariz.
DBA and Proper Representation
When you register a DBA, you are essentially getting permission to call your businesses something other than its legal name. That DBA registration lets you legally accept payments under the DBA name and use the name on checks and in advertising. If, on the other hand, you name a business something other than its legal name, and you don’t register a DBA, you could be accused of fraud. And you certainly don’t want that mess on your hands.
Let the Buyer Beware
Just as you have the right to know who you are buying from, so do others, of course. That’s why states and other municipalities require businesses with fictitious names to register their DBA statements with the government, letting the public know who its owners are. Let’s say a woman purchases defective tires from a business and she wants to file a complaint with the owners of the company. With a fictitious name, the owners of the business aren’t readily apparent, but because of the law and the legal filing that the owners must submit, the woman can find out who owns the company by doing a little research with her local government. In addition to the legal filing, some jurisdictions also require business owners with DBAs to publish notices in a local newspaper to further notify the community of the relationship between the entities.
“Each state or county is different,” says Pollicino. “Make sure you are meeting your particular jurisdiction’s criteria.”
The DBA Registration Process
One of the first steps in registering a DBA should involve doing a trademark search to make sure the name you’ve chosen for your business isn’t trademarked by someone else. Keep in mind that just because a domain name is available, it doesn’t necessarily mean that the business name hasn’t been taken. So, either do the search yourself through your Secretary of State’s office or hire someone to search both the state and federal trademark database for the business name. Once you are confident the business name has no existing trademarks on it, you will pay between $10 and $100 to register each name with your county or state government.
Whether you are creating a series of Web sites, retail stores, restaurants or another type of business, using DBAs or fictitious names may be the way to grow inexpensively and simply. Just remember that registering the appropriate DBAs are essential to being within the law and representing yourself honestly to the public.
Filing a DBA enables you to create new business names under your already established business entity. Once you file, here are some of the advantages you enjoy as a DBA. You can:
Do business under the new name
Use the business name in contracts
Print checks with the new business identity
Get a business telephone listing and number
Advertise
Accept Payments
DBAs have other names. Here are a few of them:
Doing Business As
DBA
Trading As
Fictitious Business Name
Fictitious Name
Trade Name
Assumed Name
Trade Styles
Assumed business name
This article was contributed by Cecile Duhnke, marketing communications manager with LegalACE.com, a Scottsdale, Ariz. legal document preparation firm. The information in this article should not be considered legal advice. For legal advice, please contact an attorney.
Calling All Electronic Entreprenurs!
Online Legal Document Services Simplify the Process
It’s one of the biggest decisions of your life: starting your own business. You’ve decided a corporation – rather than a partnership or LLC -- best meets your needs. Now what? Go online, of course! You can prepare the legal documents necessary to form a corporation on the Internet.
“It has never been easier or more affordable to form a corporation,” says Adam Pollicino, chief operating officer of LegalACE, a Scottsdale, Arizona. an online legal document preparation company. “We have simplified the process and made it extremely comprehensive.”
Why Incorporate?
Before you get rolling, you’ll need to be confident about your choice of business entities. Make sure you educate yourself about the advantages of corporations over, say, partnerships and limited liability companies (LLCs), for example. Here are four reasons to choose a corporation, according to “Get Ready: Forms of Business Ownership,” an article which appeared on the Small Business Administration’s Web site: http:/www.sba.gov/smallbusinessplanner/plan/getready/Corp_learn_more.html
Advantages of Corporations
Shareholders have limited liability for the corporation's debts or judgments against the corporations.
Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
Corporations can raise additional funds through the sale of stock. A corporation may deduct the cost of benefits it provides to officers and employees.
Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
Limited Liability
Probably the biggest advantage of creating a corporation over other legal business entities is the financial shelter it offers its owners. It affords the officers, shareholders and their families protection against creditors in case the company files bankruptcy or experiences other financial setbacks. Family belongings like cars and homes are shielded from creditors (unlike sole proprietorships or partnerships, for example).
“Shelter from creditors ranks high among businesspeople who choose corporations,” says Pollicino. “Tax benefits are next.”
Tax Advantages
Corporations enjoy tax advantages that other business types don’t. As the owner of a corporation, you can deduct health insurance premiums that you have paid on behalf of an owner-employee. You also save on self-employment taxes, as corporate income isn’t subject to Social Security, Workers Compensation and Medicare taxes. Life insurance can also be deducted in most cases.
Raising Money/Profile
When it’s time to raise cash for the business, corporations have a ready-made system: they can sell their stock. Plus, when it’s time to ask for a loan from a bank, corporations tend to have more clout over other business types.
“Creating a corporation not only protects you from liabilities, but it can also boost your credibility in the business community,” says Pollicino.
Unlimited Life
The life of a corporation doesn’t depend on the lifespan of its members. In fact, the officers could die, but the corporation would live on. Likewise, even if the owners sell their interest, the corporation would continue to function, as always.
Why Online?
With soaring gasoline and food prices and recessionary fears everywhere, the smart businessperson should want to cut costs where he or she can. One way is to avoid the attorney’s office is by incorporating online. I don’t just mean ordering the documents and filling them out yourself. It’s easy enough to find the documents you need online. But navigating them and filling them out correctly is an entirely different story. They are made so that the legal jargon and convoluted circular language can only be interpreted by an attorney.
“You could order the documents and fill them out by yourself,” says Pollicino. “But why would you when we can help you through the process?”
On the other hand, going through an online legal document preparation company gives you the peace of mind. You know you’ve filled out the forms correctly, you’ve gotten the blessing of the staff and you know the paperwork is ready to be filed. So, go ahead! Incorporate your business online. It’s inexpensive, easy to do and painless.
This article was contributed by Cecile Duhnke, marketing and communication manager with LegalACE, a Scottsdale, Ariz. legal document preparation firm. The information in this article should not be considered advice. For legal advice, please contact an attorney.
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