An entity is a business organized according to state law to limit the liability of the owners. Entities can be corporations, limited-liability companies (LLCs) and limited partnerships (LPs). All provide much greater asset protection when compared to a sole proprietorship or general partnership.
A corporation is a separate legal entity formed by individuals and/or other business entities for the benefit of limited liability, asset protection, tax savings and ease of ownership. The owners of a corporation are shareholders, the management is known as officers and directors.
A limited-liability company (LLC) is also a separate legal entity formed for limited liability and asset protection purposes. The owners of an LLC are called members and the management is referred to as managers. LLCs are frequently used for holding real estate and other personal assets.
A limited partnership (LP) is a separate legal entity formed for limited liability and asset protection purposes. The owners of an LP are known as general and limited partners. The management resides exclusively with the general partner. While the limited partners are limited in their liability, the general partners are personally liable for the LP activities. This unlimited liability can be resolved by forming a corporation or LLC to be the general partner.
If structured properly, the liability of the owner is limited to the amount of their investment in the entity. Thus, the personal assets of the owner will be protected against any business claimants. If you sign a personal guarantee, however, you will be personally responsible for that obligation. This personal responsibility is only to the party you contracted with and does not extend to others.
There are many tax benefits to using a corporation, LLC or LP. Many business expenses are easily written off, and in the right structure, pre-tax dollars can be used for valuable benefits packages. As well, the risk of an IRS audit is lower with business entities.
A C corporation is a corporation that is taxed at two levels. First, the corporation pays corporation taxes on corporate profits. Then, with any money left over, the corporation may distribute profits to the shareholders. These profits, or dividends, are taxed to the shareholders. Thus with a Corporation there is “double taxation”. The “C” refers to an IRS code section. Despite the double taxation, C Corporations offer many planning and benefit opportunities.
Corporations have been used for over 500 years to limit owners’ liability and thus encourage business investment and risk taking. Their use for this purpose continues to this day.
You will hear about both C corporations and S corporations. Both are corporations with charters granted by the state of organization. You can organize in Nevada for the best asset protection laws, for example, and qualify to do business in California. In that case, you will have one corporation paying annual fees in two states (which many people do).
The C and the S refer to IRS Code Sections. C corps feature a double taxation – one tax at the company level and another tax on profits distributed to shareholders. This double tax is why many people consider S corps, which has only one level of tax. But there are restrictions on ownership of S corps, where as there are no such limits on C corps.
Let Corporate Direct help you decide which corporation is best for you, or learn more about the strengths and weaknesses of different entity types from our book “Start Your Own Corporation“. See the rest of Garrett Sutton‘s Rich Dad series of books for business owners.
An S corporation is a corporation that has elected to be taxed as a flow though entity (similar to an LLC or LP). The “S” also refers to an IRS code section. Providing for this type of taxation, the S election allows the shareholders to be taxed only at the individual level instead of at both the corporate and individual level, thus avoiding the double taxation like the C corporation. The S corporation still provides limited liability protection and is a good entity for many business situations.
S Corps are favored by many business owners. The single taxation (as opposed to the double tax of a C Corp) is limited liability protection – especially with a Nevada corporation with charging order protection extended to corporate shares – make the S Corp an attractive entity choice.
Please know that of all of the entities the S Corp has certain restrictions on ownership. There can only be 100 or fewer owners, which all must be individuals or their living trusts. Corporations, multi member LLCs, and non-US residents cannot be S Corp owners. If the restrictions aren’t followed, the IRS will deem the corporation a double taxed C Corp.
Corporate Direct can help you understand the restrictions and benefits of the S Corporation.
The charging order (especially under Wyoming and Nevada law) is the key asset protection feature of LLCs and LPs. The charging order is a lien against distributions from the LLC or LP. If no distributions are made the judgment creditor does not collect. Importantly, under Nevada and Wyoming law the judgment creditor cannot force a sale of the asset(s) like they can in California and other states.
Yes, Nevada provides corporations with between one and 99 shareholders the same beneficial charging order protection.
An EIN is like a Social Security Number for a business. The IRS assigns such a number to each newly formed entity. It is used as an identifier when opening bank accounts, hiring employees and the like.
In order to maintain the limited liability protection afforded corporate entities certain minimum formalities must be met. These include filing statements and paying annual fees, maintaining a resident or registered agent and keeping corporate minutes. Failure to follow these formalities can result in personal liability to officers, directors and shareholders.
Each state requires that a resident (or registered) agent be identified and located in the state of incorporation and any states where business is conducted. The resident agent’s job is to accept service of process (i.e., notice of a lawsuit) and other official notices. Because lawsuits are served on the resident agent it is important to use a service that is professional, appreciates the importance of such notices and will be in business for the long-term. Corporate Direct, Inc. provides resident agent services for $125 per year (free to new entities in their state of formation for the first year).
Most every state requires that the owners and managers of an entity meet once a year to discuss the affairs of the business. To prove that this required meeting took place, minutes detailing decisions made at the meeting are written and kept with the corporate, LLC or LP records. Corporate Direct, Inc. provides minute preparation services for a modest fee of $150 per year.
An important element in using a corporation is providing the public with notice that they are doing business with a corporation. To that end, you will use Inc., LLC or LP, for example, on all of your brochures, contracts, checks, cards, and the like.
Business credit is a separate track of financing independent of your personal credit. Using business credit strategies wisely can greatly assist you with your growth objectives. For more information visit www.businesscreditsuccess.com.
To view a current listing of Corporate Tax Rates, click here.
First, you cannot use the name of a corporation, LLC or LP that is already in use and registered with the state. While Corporate Direct, Inc. will perform an initial name search to minimize this issue it is helpful to have several names in mind for possible use. Second, if you are going to organize in one state and qualify in another state the name should be available in both states. Third, a corporate name should not be confused with a trade name or trademark. While you may be able to incorporate using one name you will not automatically, without filing for trademark protection, be protected in using your corporate name as a trade name.
Foreign investors are welcome to invest and do business in the U.S. Still, they must realize that the U.S. is a litigious society and they must protect themselves with asset protections strategies as any American would. Depending on their country’s tax system and double tax treaty with the U.S., LLCs and C corporations can be used to protect foreign investors.
Many people will form an entity in Nevada for the privacy and asset protection benefits and then qualify to do business in their home state, California, for example. The qualification process involves having our Nevada office; for example, provide a certificate of good standing for the Nevada corporation and then file with the California Secretary of State for permission for the Nevada corporation to do business in California. It is not an overly complicated process, but it is an important process to ensure that your entity’s limited liability protection follows you into the states in which you actively conduct business. Corporate Direct, Inc. provides the qualification service for $374 per entity, plus applicable state filing fees.
Corporate Direct, Inc. provides affordable entity formation and maintenance services. As our fee sheets indicate, given the risks associated with doing business and holding real estate as well as the possible loss of personal assets, the benefits of limiting liability and protecting assets for a very affordable price are quite substantial. Click here for our formation fees.