The limited liability company (LLC) is a distinct business entity that combines the corporate advantage of limited liability protection with "pass-through" taxation, the method of taxation afforded to both general partnerships and S corporations.
Like corporations, LLCs come into existence after making a filing with the appropriate state body, typically the Secretary of State, and paying the necessary state filing fees. The LLC formation documents are typically called articles of organization or a certificate of organization.
In terms of taxation, the LLC's income
is not taxed at the entity level as is that of a C corporation.
While the LLC does complete a tax return, the income or loss of
the LLC as shown on this return is passed through the LLC and
is reported on the owners' individual tax returns. The LLC’s owners
then pay taxes on the LLC’s profits at the individual tax level.
LLCs can elect with the Internal Revenue Service (IRS) to be taxed
like a C corporation, but this is not overly common.
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The standard corporation, also called a C corporation, is a very common business structure. Corporations are separate legal entities that are owned by shareholders. Conversely, sole proprietorships and partnerships are not separate legal entities. They are considered to be the same as the owner(s). In order to form a corporation, the appropriate formation documents, usually called the articles of incorporation or a certificate of incorporation, must be filed with the state and the state filing fees be paid.
The primary advantage of incorporating a business is the limited
liability the corporate entity affords its shareholders. Typically,
shareholders are not personally liable for the debts and obligations
of the corporation; thus, creditors will not come knocking at
the door of a shareholder to pay debts owed by the corporation.
In a partnership or sole proprietorship the owner's personal assets
may be used to pay debts of the business.
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A nonprofit corporation is a corporation that is formed for
purposes other than generating profit. Nonprofit corporations
are formed pursuant to different state law than standard for-profit
corporations. There are many types of nonprofits, such as churches
or church associations, charities, schools, medical providers,
legal aid societies, volunteer services organizations, professional
associations, research institutes, museums, and in some cases
sports associations.
The most common type of nonprofit is the 501(c)(3) nonprofit,
which are organized under Section 501(c)(3) of the Internal
Revenue Code. These nonprofits are created for some religious,
charitable, educational, literary, or scientific purpose allowed
by this section of the code. As mentioned above, nonprofits
can be organized for other purposes. For example, Chambers of
Commerce are 501(c)(6) nonprofits and cooperative hospital service
organizations are 501(e) nonprofits.
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Corporate Compliance - Avoid Piercing the Corporate Veil
Many new business owners are unaware of the requirements they must fulfill in order to keep their corporation or limited liability company (LLC) compliant with the state of formation. Incorporating a business or forming an LLC offers business owners the protection of limited liability, meaning the owners are typically not held responsible for the debts of the company. However, just having a corporation or LLC does not mean that the owners’ personal assets are continually protected. Business owners must comply with specific requirements in order to remain protected under that corporate or LLC status. Otherwise, their limited liability may be lost, which is known as “piercing the corporate veil.” Small business owners should understand the direness of this situation and work to maintain the limited liability the corporation or LLC affords them.
All states impose certain requirements on corporations and LLCs formed there. One such requirement is the filing of an annual statement (a biennial statement in some states). These statements are the state’s way of keeping updated information on corporations and LLCs. Most states also impose a filing fee on these statements. Not filing annual statements and paying the necessary fees in a timely manner can result in the corporation or LLC being in “bad standing” with the state. Being in bad standing in a state can eventually lead to administrative dissolution of the corporation or LLC. Therefore keeping your corporation or LLC in good standing at the state level is important.
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More Professional Corporation Basics
Professional corporations (PCs) and professional limited liability companies (PLLCs) are corporations and limited liability companies organized for the purpose of providing professional services. What services constitute professional services are defined by state law. Typically professions that require a license, such as doctors, lawyers, accountants, architects, or engineers are required to form a PC or PLLC.
The formation of a professional entity is very similar to the formation of a standard corporation or LLC. The appropriate formation document, the articles of incorporation for a corporation or the articles of organization for an LLC, must be filed with the state and the necessary state filing fees be paid. However, with professional entities, an additional approval may be required by the proper state licensing body before the document can be filed with the Secretary of State. Further, the formation documents typically must contain the signature of a licensed professional in the same field of service as the incorporator. That person’s license number may also be required. For example, a PC being formed to provide chiropractic services may require the signature of a licensed chiropractor as incorporator. Because of these additional requirements, the filing time for professional entities may be longer than the filing time for standard business entities.
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More Registered Agent Services
Virtually all states require corporations and LLCs to appoint
a registered agent in the state where the company is formed.
The registered agent is responsible for receiving important
legal and tax documents including: notice of litigation (service
of process), franchise tax forms and annual report forms.
The registered agent may be an individual or a company approved
by the state to act as agent, located at a street address in
the state where the company is formed. The registered agent’s
name and address are included on the formation documents. This
information is a matter of public record, meaning that anyone
has access to it.
Benefits of Using a Registered Agent Provider
Registered agent providers, such as BizFilings, are companies
that act as registered agent for many businesses. These companies
understand the important role the registered agent plays, and
strive to provide excellent service for your business.
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Subchapter S Corporations
A subchapter S corporation is a standard corporation that has elected a special tax status with the Internal Revenue Service (IRS). S corporations carry the same benefits as C corporations, such protecting the shareholders’ (or owners’) personal assets from the debts and liabilities of the business, unlimited life and tax deductibility of certain business expenses. The primary differences between S corporations and C corporations are the way they are taxed and also the ownership restrictions S corporations face.
When deciding which entity structure is most appropriate for their business, small business owners often view the potential double taxation of profits associated with C corporations as the primary disadvantage to forming a standard corporation. With C corporations, the profits are taxed first at the corporate level, and then taxed again at the individual level if they are distributed to shareholders in the form of dividends. Shareholders must report dividends as personal income and pay taxes on that income.
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