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Top Ten Questions to Consider when Incorporating
Published on Jan 18, 2012
Read 'Top Ten Questions to Consider when Incorporating' at 'Time to Start Up,' the small business blog by BizFilings.
Ready to take your sole proprietorship or small business to the next level? Forming an LLC or an S corp may be the way to go.
To follow are ten questions to help you determine if either of these options is the right choice. Keep in mind that there are other formation options, including Nonprofit and C corp, which may better suit your company's needs.
Are you looking for Limited Liability Protection?
One of the major benefits of incorporating, Limited Liability Protection means that business owners are typically not personally responsible for business debts and liabilities. LLCs and S corps both provide Limited Liability Protection.
Are you looking for pass-through taxation?
With pass-through taxation, no income taxes are paid at the business level. In a nutshell, business profit or loss is passed-through to owners’ personal tax returns. Any necessary tax is reported and paid at the individual level. Both LLCs and S corps are typically pass-through tax entities.
Are you looking for an unlimited number of members, or a limited amount?
LLCs are able to have an unlimited number of members, while S corps can have no more than 100 shareholders (owners).
Will all of your members be U.S. citizens?
Non-U.S. citizens/residents can be members of LLCs, but S corps are not permitted to have non-U.S. citizens/residents as shareholders.
What kinds of ongoing formalities is your company prepared to meet?
It's important to understand that S corporations face more extensive internal formalities. On the other hand, LLCs are recommended — but not required — to follow internal formalities. Some required S corp formalities include adopting bylaws, issuing stock, as well as holding initial and annual director and shareholder meetings. Recommended formalities for LLCs include adopting an operating agreement, as well as holding and documenting annual member meetings. What is required of LLCs is the issuing membership shares (units).
What are your management preferences?
LLCs can choose to have members (owners) or managers manage the LLC. When members manage an LLC, it's similar to a partnership. When managers run an LLC, it more closely resembles a corporation. In other words, members will not be involved in the daily business decisions. S corps have directors and officers. There's a board of directors that oversees corporate affairs and handles major decisions — but not daily operations. With S corps, directors typically elect officers who in turn manage daily business affairs.
Is there a chance you might want to one day transfer ownership?
S corp stock is freely transferable, as long as IRS ownership restrictions are met. LLC membership interest (ownership) typically is not freely transferable. In most cases, it must be approved by other members of the LLC.
How do you feel about self-employment taxes?S corps may have preferable self-employment taxes compared to an LLC. This is true because an S corp owner can be treated as an employee and paid a reasonable salary. FICA taxes are withheld and paid on that amount. Corporate earnings after payment of the salary may be able to be treated as unearned income that is not subject to self-employment taxes. Click here for more on self-employment taxes.
What are your future ownership plans?
When it comes to S corps there are restrictions on ownership. They cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. LLCs do not have these restrictions.
We're Here to Help
If you have questions, or would like our assistance with forming your company, feel free to give our customer service team a call between 8am and 7pm CST, at 800-981-7183. Or, send us an e-mail anytime. You can also utilize our free Incorporation Wizard to help define which business type suits you best.