Corporation, S Corporation, Limited Liability Corporation Frequently Asked Questions by Lanick, Mesa Arizona

Q & A's about corporations

What is a corporation?

A corporation is a legal entity that exists separately from its owners. Creating a corporation requires the proper completion and processing of Articles of Incorporation be submitted to the Arizona Corporation Commission for approval (fees apply). Once approved, the articles must be published in a newspaper and the process of "breathing life into the company" is completed. Lanick will assist you with all three steps!

Do I need an attorney to incorporate?

No, an attorney is not a legal requirement. You may prepare and file the articles of incorporation yourself; however, you should understand the requirements and proper processing of documents. You can use our service to incorporate and save money on attorney fees, time and headaches. If you are unsure as to whether an incorporation will benefit your business you may want an initial consultation with an attorney or accountant. Don't have a attorney or accountant? No problem * contact us today for a free referral

What should I name my corporation?

Choose your company name carefully. What image are you trying to convey? What do you want your customers to remember? By Law the name you choose must not be "deceptively similar" to any existing company and "distinguishable on the record" at the Arizona Secretary of State.

What are the advantages of incorporation?

There are so many advantages to incorporating your business. First and foremost is the limited liability protection of your personal assets from lawsuits or creditors. Incorporating helps separate your personal assets from that of your business assets. This means the, shareholders, officers and directors, are not liable for the debts and obligations of the corporation, therefore, creditors will not come knocking at your door to pay debts of the corporation or hold you personally responsible in a corporate lawsuit (provide the suite was not a result of an unlawful act on the behalf of an officer / director / shareholder). In other words maintaining limited liability requires shareholders and directors follow all the government rules and guidelines, including, but not limited to holding annual meetings and maintaining meeting minutes, Lanick offers all these documents in one easy to manage and use corporate records book.

Other advantages:

Perpetual Existence A corporation's life is not dependent upon its members. A corporation's life is unlimited. If an owner dies or wishes to sell his or her interest, the corporation will continue to exist and do business.
Investments and Benefits Retirement funds and qualified retirement plans (like 401k) are more easily setup with a corporation.
Transferability of Ownership - Ownership of a corporation is easily transferable.
Sale of Stock Capital can be raised through the sale of stock. Additionally, many banks, when providing a small business loan, want the borrower to be an incorporated business.
Establishing Credibility - Forming an corporation may help a new business establish credibility with potential customers, employees, vendors, and partners.
Central Management - A corporation possesses centralized management. Typically, the board of directors will manage the company. The board will select officers to run the company. In a small business setting with one owner, this person will be a director, an officer, and an owner.
Limited Liability - Corporations provide limited liability protection to its owners. Typically, the owners are not personally responsible for the debts and liabilities of the business; thus, creditors cannot pursue owners' personal assets (such as a house or car) to pay business debts. Conversely, in a sole proprietorship or general partnership, owners and the business are legally considered the same and personal assets can be used to pay business debts.
Tax Advantages - Corporations often gain tax advantages such as: the deductibility of health insurance premiums paid on behalf of an owner-employee; savings on self-employment taxes, as corporate income is not subject to Social Security, Workers Compensation and Medicare taxes; and the deductibility of other expenses such as life insurance. For information on the types of tax advantages your business may gain by forming as a corporation, please speak with an accountant or tax advisor.

What is an S corporation?

Standard business corporations or C corporations are required to pay income tax on taxable income generated by the corporation. By completing and filing federal Form 2553 with the IRS, your C-corporation will elect sub chapter S election. This is a way to avoid having your corporation treated as a separately taxed entity.
An S corporation is a standard business corporation that has elected a special tax status with the IRS. This tax treatment allows the corporation not to be a taxed separately. Instead, the income of the corporation is treated like the income of a partnership or sole proprietorship in that the profits or losses of the company "flow through" or are "passed-through" to the shareholders. Therefore, the shareholders' individual tax returns report the income or loss generated.
Most small business owners naturally will avoid double taxation by paying out income in the form of salary and bonuses. Both salary and bonuses, and any other form of employee compensation, are direct reductions from the net income of the corporation, hence taxing the owner only once, at the individual level.

In order to qualify for S corporation status, the corporation can have no more than 75 shareholders, who must all consent in writing to the election to be an S corporation. The shareholders cannot be non-resident aliens. Also, an S corporation can have only one class of stock (Common Stock).

What are the advantages of an S corporation?

S corporations avoid the possibility of double taxation on profits
Shareholders of an S corporation are typically not personally responsible for the debts and liabilities of the business
Ownership of an S corporation is easily transferable through the sale of stock
S corporations have unlimited life extending beyond the illness or death of the owners
Additional capital can be raised by selling shares of the S corporation's stock
Potential customers may perceive an S corporation as a more professional entity than a sole proprietorship or partnership
S corporations are generally audited less frequently than sole proprietorships
Certain S corporation business expenses may be tax-deductible
S corporations can result in Self-Employment Tax Savings
S corporations may provide a number of income and tax savings

What are the disadvantages of an S corp?

S corporations are subject to restrictions imposed by the IRS on who can be owners.
Owners (shareholders) must meet the following criteria:
Number fewer than 100
Cannot be non-resident aliens
Cannot be C corporations, other S corporations, limited liability companies (LLCs), partnerships or certain trusts.

Other disadvantages:

There is more complexity and expense with forming a corporation.
There is more extensive record keeping requirements.
Operating a corporation across state lines often requires the corporation to qualify to do business in the other state.

What is a limited liability company?

Limited Liability Companies or LLC are not a corporation. It is a distinct type of business sometimes referred to as a hybrid company because it combines the corporate advantages of limited liability with the partnership advantage of pass-through taxation.

Do I need an attorney to form an LLC?

No, an attorney is not a legal requirement. You can prepare and file the articles of organization yourself; however, you should understand the requirements or Let Lanick save you time and money by setting it u for you.

How many people are needed to form an LLC?

The IRS does allow one member LLCs to qualify for pass-through tax treatment.

How is an LLC taxed?

An LLC can be taxed for federal income tax purposes as a partnership, disregarded entity, Corporation or and S-Corporation. An LLC can elect partnership status to avoid taxation at the entity level as an "association taxed as a corporation." If an LLC is not taxed as a partnership, it will be taxed at the entity level similar to a standard or C corporation.

What is the organizational structure of an LLC?

An LLC is owned by its managers and members. Members are similar to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble shareholders if the LLC utilizes a manager or managers, because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company. Managers most closely resemble officers in a corporation.
A manager or member's ownership of an LLC represents their interests, just as partners have interest in a partnership and shareholders have stock in a corporation.

How is an LLC managed?

An LLC may be managed by its members (owners) or by selected managers (similar to officers).
If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the decision making process of the company.
If a manager or managers are elected they act in a capacity similar to a corporation's board of directors. These managers are in charge of the affairs of the company.
Member management is the normal default rule of state law. This means that if managers are not selected in the articles of organization, the members will direct the affairs of the LLC.

What are the advantages of an LLC?

LLCs allow for pass-through taxation
Members on an LLC are not typically held personally responsible for the debts and liabilities of the business
LLCs generally have no ownership restrictions
LLC members have flexibility in structuring the management of the company
An LLC does not require as much annual paperwork, or have as many formalities, as a C corporation or an S corporation
Written consent of LLC members must be obtained prior to increasing ownership in the company
Potential customers may perceive an LLC as a more professional entity than a sole proprietorship or partnership

What are the disadvantages of an LLC?

At least two members are required in many states
A Schedule C as a sole proprietor is filed unless it elects to file as a corporation
Earnings are generally subject to self-employment tax
Many states limit the life of the LLC
If 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the company will terminate
The company may lose its ability to use the cash method of accounting if more than 35% of losses can be allocated to non-managers
LLC’s cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.
Lack of uniformity
Businesses that operate in more than one state may not receive consistent treatment.
Some states do not tax partnerships; but they do tax LLC’s
Minority discounts for estate planning purposes may be lower in an LLC than a corporation.
Because LLCs are easier to dissolve, there is greater access to the business assets.
LLC discounts may only be 15% compared to 25% to 40% for a closely-held corporation.
Conversion of an existing business to LLC status could result in tax recognition on appreciated assets.

Other disadvantages:

More Paperwork than an ordinary partnership documents must be filed at the state level to create an LLC, which is not the case with a general partnership.
Newer Entity Type LLC's are a newer entity. People are not as familiar with the LLC as an entity and the laws pertaining to LLC's are not as clearly defined as corporate law, which subjects the LLC to grey area and interpretation during litigation in certain situations.