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Respond to... If I was going to form my own business, I would form an LLC. There are benefits to LLC’s, C-Corporations and S-Corporations, but the one with the most benefits for a new business that is
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If I was going to form my own business, I would form an LLC. There are benefits to LLC’s, C-Corporations and S-Corporations, but the one with the most benefits for a new business that is just starting appears to be an LLC. One thing that the three options have in common is that all three options offer limited liability except for in situations of gross negligence, fraud, and/or crime. (Taulli, 2016, para 10). LLC’s require less paperwork and start up costs that S-Corporations and C-Corporations do. LLC’s are the more flexible option of the three options. LLC’s have become the option of choice for businesses because of the benefits that LLC’s offered in flexibility for running the business and taxes. “With the LLC, they could have it all—partnership tax, limited liability, and default rules more suited to the small business than are the corporate default rules” (Friedman, 2004, p.42). The flexibility offered by LLC’s gives companies the ability to have either one or many members, be managed by the members or one single manager, etc. The LLC can file taxes as an S-Corp or C-Corp depending on what will benefit the LLC. LLC’s avoid the double taxation that C-corporations are subject to which is when the company is taxed for the earnings of the company once in the year that they are realized and again when the earnings are distributed to the shareholders. There is no requirement for LLC’s to hold board of director meetings for major decisions the way that s-corps and c-corps must. (Friedman, 2004, p. 54). The S-Corporation is for small businesses that have fewer members that are domestic. The S-corp receives tax benefits like the LLC to avoid double taxation as well, however they are subject to all other corporate tax rules. There are restrictions for S-corps as to who their shareholders can b,e and how may shareholders that they can have, and what types of investments are made. An S-corp cannot have more than one hundred shareholders in order to qualify as an S-corp. The shareholders must be an individual. S-corps cannot have more than one class of stock. (Seaquist, 2012, section 30.2) “The shareholders cannot be “non-resident aliens, other corporations and certain trusts” (Friedman, 2004, p. 50). S-corps are subject to business requirements for corporations such as holding board of director meetings with minutes for major decisions. The C-Corporation is for large corporations that do not qualify for S-Corporations due to the number of shareholders and they can be both foreign and domestic. Since financial institutions and insurance companies are not eligible for LLC and S-corp this is the option that they would use. There is no maximum number of shareholders for the company, and there is no restrictions on stock investment or who can be a shareholder. The LLC has the most benefits of the three options for my new business because it offers the most flexibility in running my business and day to day operations without having to be concerned with holding board of directors’ meetings in order to move forward with big decisions. The start up of an LLC is less complicated and easy as far as paperwork and fees. The LLC offers greater tax benefits for businesses as well to avoid double taxation. For these reasons I would choose the LLC option for my new business.
ReferencesFriedman, H. M. (2004). The Silent Llc Revolution -- the Social Cost of Academic Neglect. Creighton Law Review, 38(1), 35–96. Retrieved from http://search.ebscohost.com.proxy-library.ashford.edu/login.aspx?direct=true&db=a9h&AN=16110969&site=eds-live&scope=siteSeaquist, G. (2012). Business law for managers [Electronic version]. Retrieved from https://content.ashford.edu/Taulli, T. (2016, July 24) When to form an LLC (Limited liability company) (Links to an external site.). Forbes. Retrieved from http://www.forbes.com/sites/tomtaulli/2016/07/24/when-to-form-an-llc-limited-liability-company/#289ac1051307
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Compare an LLC with a C corporation and with an S corporation.
LLC- A new, start-up business will typically choose to be classified as an LLC because of it's quick and easy process. Along with being convenient there are various tax implications that are a positive for an LLC. The LLC itself is able to deduct operating losses from it's income which can't be done by a typical C Corp. An LLC is able to elect to be treated as a corporation, but that is unlikely due to the double taxation they would incur.
S Corp- According to corporation standards S Corp's are relatively small. These are corporations who filed to be elected as an S Corp so that they could receive specific tax breaks. There are a few qualities that could disqualify a corporation from an S Corp election such as greater than 100 shares, non-resident shareholder and more than one class of stock. If a corporation is able to be elected as an S Corp then the shareholders are able to now deduct operating losses from their dividend income. This allows for the S Corp to avoid double taxation.
C Corp- C Corp's are not eligible to be elected as an S corp and they are typically large, publicly-traded corporations. A C corp is able to have unlimited number of shareholders. One advantage of being a C Corp is that the company is seen as a separate entity there fore the corporation is able to own property, borrow/lend money, etc. under it's name. A major disadvantage of being a corporation is that it is subject to double taxation. The corporation has to pay taxes on in profits earned and the shareholders have to then pay taxes on their dividend income.
If you were operating your own business, would you choose the LLC as the organizational form for your business?
If I were starting a new business I would 100% go with an LLC. It contains much less liability than a corporation would and with a new business there are many inherent risks that are involved. According to Taulli (2016), "An LLC is treated as a pass through entity which means profits and losses go directly to the owners" (p.1) I would want to put myself in the best possible financial situations and with an LLC there is a low liability when it comes to personal assets as well as the tax deductions which are allowed for an LLC. Along with the profits going directing back to the LLC.
Seaquist, G. (2012). Business law for managers [Electronic version]. Retrieved from https://content.ashford.edu/
Taulli, T. (2016, July 29). When To Form An LLC (Limited Liability Company). Retrieved from https://www.forbes.com/sites/tomtaulli/2016/07/24/when-to-form-an-llc-limited-liability-company/#564d56b14e0d
