Entity Formation

In order to maximize your small business, choosing the right entity structure is critical. Choosing the right kind of company, corporation or partnership will provide you with greater opportunities for success in managing, operating and financing of your new business.

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The majority of business entities and/or business structures include both S and C corporations, partnerships, limited liability companies and sole proprietorships. Here is a breakdown of the most commonly used business structures:

Limited Liability Companies (LLCs)

Here are just a few things that an LLC can offer:

  • Legal business structure/entity which is separate from its respective owners.
  • Enables owners to segregate their personal assets from debts of the business.
  • Whether your LLC is managed by one owner or several owners, the LLC is taxed comparably to a sole proprietorship and/or a partnership.
  • The number of owners in an LLC is unlimited.
  • Annual meetings or recorded minutes are not required.
  • LLC’s are administered by operating agreements.

Frankly, the limited liability company is the least complicated business entity. As an alternative to the s-corp and c-corp business structures, the LLC has flexibility. Additionally, the pass-through taxation and limit on personal liability protection and very appealing advantages.

Limited Liability Company Advantages

Although we have already discussed the benefits of creating an LLC, here are a few more.

  • Filing a corporate tax return is not necessary as LLC’s have pass-through taxes. The LLC owners profit and loss are reported on the owner’s individual tax return.
  • There is no residency requirement or U.S citizenship requirement for owners.
  • There is no residency requirement or U.S citizenship requirement for owners.
  • Enjoy similar corporate legal protections for debts and obligations relating to the business.
  • LLC’s are helpful in creating credibility with people that you may do business with such as lenders, suppliers and distributors.

Limited Liability Company Disadvantages

Although an LLC is a great option when creating a business entity, there may be some obstacles.

  • Shares of stock cannot be issued in order to entice investors.
  • LLC’s are not treated equally in several states.
  • Earnings by the LLC may be subject to a self-employment tax.
  • If existing business assets are converted to an LLC, a tax bill may result on the appreciation of the assets.

C-Corporation Business Entity

  • Tax and legal organization is segregated from the owners.
  • Beneficial in separating owner’s personal assets from debt of the business.
  • Unlimited shareholders.
  • Taxes are based on shareholder dividends and the corporation’s profits.
  • Mandatory requirement for holding annual meetings and recording of the meeting minutes.

The C-corporation business entity is the most commonly created corporation. C-Corps propose infinite growth potential by the ability to sell stocks to potential investors. Additionally, there is no limit to the c-corps potential shareholders.

Advantages of a C-Corporation

Here are just a few of the benefits for a C Corporation:

  • The limited liability protection of the c-corporation extends to not only the officers, directors and shareholders, but also the company employees.
  • Whether the owner stays on board or leaves, the company can exist in perpetuity.
  • Prestigious and respected business entity.
  • With the ability to continuously sell shares of stock in the company, the growth potential is unlimited.
  • While there is no limit to how many shareholders a c-corporation can have, at the time when the company’s total number of shareholder is above 500 and assets of the corporation reach a value of $10,000,000, there is a requirement to register with the Securities and Exchange Commission.
  • Business expenses are tax deductible.

Disadvantages of a C-Corporation

Unlimited growth potential does come with a price:

  • C-Corporations have double taxation.
  • C-Corporations have greater start-up costs and fees than other business entities.
  • C-Corporations are also required to pay fees the state where they operate their business.
  • Due to the complexity of tax rules for C-Corporations have more formalities and regulations.
  • Shareholders cannot take corporate losses as a deduction on their personal returns.

C-Corporation and S-Corporation How They Compare:

C-corporations and S-corporations are similar in that they both provide: limited liability protection, the filing of the Articles of Incorporation and consist of officers, directors and shareholders. The differences reside in ownership and tax issues.

As previously mentioned, double taxation applies to c-corporations because s-corporations are pass through tax structures, which permits them from being taxed corporately and then additionally on the personal income tax of shareholders.

S-corporations do not have the unlimited growth potential as c-corporations since the maximum number of shareholders that an s-corporation can have is 100. Additionally, an s-corporation cannot be owned by a business entity, but rather a natural person.

S-Corporation Business Entity

  • Business entity with tax and legal arrangement separate and distinct from the owners.
  • Company profits and loss are utilized on the owner’s personal tax returns.
  • Max number of shareholders is 100 and must also be residents and have U.S. citizenship.
  • Annual meeting and recording of meeting minutes are required.

Advantages of S-Corporations

  • An s-corporation’s officers, directors, shareholders and employees benefit from limited liability protection.
  • S-corporation owners can take advantage of pass through taxation.
  • Income not double taxed.
  • Taxes only need to be filed annually, while c-corporations must file quarterly returns.

Disadvantages of S-Corporations

Here are a few considerations before creating your subchapter s-corporation:

  • Dissimilar to a Limited Liability Company and C-corporation, S-corporation ownership requires legal residency and U.S. citizenship.
  • Limited number of shareholders at 100.
  • Cost of forming S-corporation is higher than a Limited Liability Company including the annual renewal amount.
  • Tax filing requirements are strict and accidental mistakes in filing can dismiss the S-corporations’ status.
  • IRS scrutinizes S-corporations more closely due to the fact that payments to shareholders and/or employees can either be salary or a dividend and taxed differently.

Partnership Business Entity

  • Partners are personally liable in the event business lawsuit occurs.
  • There is no filing necessary to create a partnership and easier to operate.
  • Partnership owners report the business profit and losses on personal income tax returns.

Limited Partnership Business Entity

The limited partnership business entity is very similar operationally to a general partnership with a few added bonuses.

In a limited partnership, the general partner handles management of the business and consequently is the one who endures the liability of the company including obligations and debts. Liability is limited is provided for a limited partner equal to the amount that the limited partner has invested in the business.

Limited partners are often called silent partners in that they do not have any say in the daily operations of the business, but rather provide capital for the business as investors.

The preferred business entity for attorneys, accountants and financial firms is a limited partnership. Additionally, this entity is prevalent in businesses that deal in projects that are time sensitive including real estate companies.

Advantages of Forming a Limited Partnership Business Entity

  • Limited partners get personal asset liability protection equal to the amount that they invested in the business.
  • Similarly, to the s-corporation, the limited partnership has pas through taxation, meaning that the limited partner gets to report the business profits and loss on their personal tax returns.
  • In a limited partnership, all management decisions and day to day operations are made by the general partners.
  • Funding for a limited partnership can come from investments into the business by adding additional limited partners.
  • When a limited partnership is first formed, several issues need to be planned as to the limited liability into the formation of the limited partnership such as the effect of insolvency, bankruptcy or death of either the general or limited partners on the future continuance of the limited partnership.

Sole Proprietorships Business Entity

  • The sole proprietorship owner is personally liable in the event that lawsuits are filed against the business.
  • No requirement to file any forms in the state of where the business operates.
  • Easiest business entity to create and operate.
  • The sole proprietorships business profits and losses reported on owner’s personal return.

How Orsatti & Associates Can Help You With Your Business

We understand the importance of your business endeavor and will assist our clients in making informed decisions as to formation of the appropriate type of corporate entity best suited for their particular needs and enable them to fully avail themselves of the various protections associated with corporate formation such as personal liability protection and tax advantages. At Orsatti & Associates, P.A, we handle business entity formation of:

  • Sole proprietorship
  • General partnership
  • Limited liability partnership (LLP)
  • Limited liability company (LLC)
  • Professional limited liability company (PLLC)
  • C corporation
  • Subchapter S corporation
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In addition to the foregoing, we also handle preparation and filing of applications for Federal Employer Identification Numbers (FEIN) and entity IRS tax elections as well as annual report filings, preparation of annual/special minutes and preparation and filing of amendments to articles of incorporation/organization.

Business and Commercial Transactions

Business and commercial transactions are inherently complex. Business sale and purchase Contracts must be negotiated and confirmed, due diligence investigations must be structured and executed, licenses must be transferred, financing, leases, employment agreements and closing documents need to be negotiated, prepared and confirmed. The challenge for a lawyer is to manage all of these details without losing sight of the big picture — assisting clients to achieve their business and personal objectives. At Orsatti & Associates, P.A., our range of services covers the preparation, review and/or negotiation of any of the following related to business and commercial transactions:

  • Partnership Agreements
  • LLC/LLP Operating Agreements
  • Shareholder Agreements
  • Asset Sale and Purchase Agreements
  • Stock Sale and Purchase Agreements
  • Due Diligence
  • Mergers and Acquisitions
  • LLC Membership Assignment/Sale Agreements
  • Financing Documentation - Promissory Notes/Mortgages/Security Agreements/UCC Filings
  • Independent Contractor Agreements
  • Employment Agreements
  • Confidentiality/Nondisclosure Agreements
  • Noncompetition Agreements
  • Business License/Dealership Agreements
  • Dissolution Agreements