Starting a business has become an increasingly complex proposition as regulatory and compliance matters continue to mount for new business owners, and there are a variety of liability, tax planning, exit strategies, and effective governance provisions that must be considered. The structuring decisions you make at the beginning of a new venture will have a real impact on your long-term success.
A little planning can go a long way
Starting a new company is an exciting time in the life of an entrepreneur. A modest amount of planning at the outset can save a lot of cost and aggravation down the road. A properly structured business entity has a lot of advantages over the long-term.
There are a number of issues for a startup company to consider when forming the business entity. Two of the most important are tax considerations and limiting liability. Partnerships and corporations have considerable differences in the way they are taxed and the proper structure for a given venture will depend largely on business goals and the particular ownership circumstances. Similarly, shielding owners from liability should be a priority for business owners. There are a number of ways to achieve this goal and business owners must be careful to structure the business properly in order to assure an effective limitation of liability. For both the tax and liability issues, it is important to seek professional guidance.
Depending upon the nature of the business, there are a wide range of other issues for the entrepreneur to consider. These range from the somewhat mundane, such as obtaining an employer identification number from the IRS and setting up bank accounts, to the potentially critical, such as an effective strategy for protecting intellectual property rights. Whether considered mundane or complicated, there are a myriad of issues that, if not properly addressed, can become serious headaches for the small business owner.
At some point during the business growth cycle most companies reach a juncture where hiring employees is a consideration. This decision comes with another layer of planning and compliance requirements. Along with employees come obligations for tax withholding, state and federal unemployment insurance premiums, and workers compensation. In addition to complying with requirements of regulatory authorities the proprietor should also consider internal employee matters such as benefits packages and employee policies memorialized in a formal employee handbook. As with most substantive issues faced by the small business owner, employee matters can be handled in a variety of ways depending on the particular circumstance.
The bottom line for all entrepreneurs starting a business is that a small amount of planning can pay significant dividends down the road. Often it is much more difficult and expensive for a company to remedy structure and compliance issues after a business is fully operational. By spending a modest amount of time and resources at the outset, companies can be optimally positioned to succeed over the long term. Joshpe Mooney Paltzik LLP provides clients with practical legal advice that effectively addresses the real world circumstances and financial realities of a given situation. Our goal is to put our clients in the best possible position to excel in the business world.
Is a limited liability company better than an S-Corp?
Whether to form a limited liability company (“LLC”) or an “S-Corp” is a question often pondered by new business owners. The first thing to understand is the basics of the entity structures. An LLC, like a corporation or a partnership, is a particular form of legal entity that is formed pursuant to state law. However, contrary to popular belief, a so-called “S-Corp” is not a distinct legal entity. Rather, S-Corporation status is a tax election made through a filing with the IRS. The choice typically faced when a business owner refers to the LLC v. S-Corp decision is whether to (i) form a corporation under state law and make the requisite filings to be treated as an S-Corp for tax purposes or (ii) form the business as an LLC.
From the tax perspective, there are a lot of similarities between an LLC taxed as a partnership (the most common tax scenario for an LLC) and an S-Corp. Both are treated as pass-through entities, meaning that the profits and losses pass through the business to the owners of the entity; there is not a separate federal income tax paid at the entity level. This characteristic differs from a corporation that does not make the S-Corp election (commonly called a “C-Corp” because of the applicable section of the tax code) in that the C-Corp pays a tax at the entity level and then a second tax is paid by the C-Corp’s owners when the C-Corp pays dividends. The primary tax structure of the LLC and the S-Corp is similar. However, depending on the timing of the decision and the status of the underlying business, the practical tax effect for owners can be drastically different depending on whether an entity is a corporation or an LLC.
There are various other characteristics of the LLC and the S-Corp that have significantly different ramifications for the business owner. For instance, there are ownership restrictions on an S-Corp including a maximum of 75 shareholders. Additionally, an S-Corp has requirements regarding owner distributions and corporate governance that limit some of the flexibility provided by the LLC.
At the same time, there are advantages that the S-Corp structure can have over the LLC. Within certain parameters, the S-Corp may provide owners with payroll tax savings not available to owners of the LLC. Additionally, the corporate structure of the S-Corp can simplify certain circumstances when an owner dies or leaves the company.
The bottom line for business owners is that there is not a simple answer to the LLC v. S-Corp question. The decision will be fact driven depending upon the particular circumstances of the owners and the business. As with other issues pertaining to a start-up company, the particulars of the business structure are something that legal counsel should be retained to analyze so that the company will be in the best possible position to succeed.