Pine Barrens Mafia Posted August 20, 2009 Share Posted August 20, 2009 I'm posing a question to you folks to get some clarification on the advantages of an LLC versus a S-Corp. Does one of those entities hold an inherent advantage over the other when it comes to personal asset protection? Also, is one less costly to maintain over its lifetime when it comes to taxes and legal fees? Thanks in advance for any advice. This stuff is new to me and rather confusing. Link to comment Share on other sites More sharing options...
bills44 Posted August 20, 2009 Share Posted August 20, 2009 How many members/shareholders? You plan on adding or removing members/shareholders? No real advantage one way or the other from a liability/asset protection standpoint. LLC is more expensive for initial set up, but the long-term maintenance ciosts are relatively the same. Link to comment Share on other sites More sharing options...
Pine Barrens Mafia Posted August 20, 2009 Author Share Posted August 20, 2009 How many members/shareholders? You plan on adding or removing members/shareholders? No real advantage one way or the other from a liability/asset protection standpoint. LLC is more expensive for initial set up, but the long-term maintenance ciosts are relatively the same. 1, possibly 2-3 in the future for a number of people. Link to comment Share on other sites More sharing options...
bills44 Posted August 20, 2009 Share Posted August 20, 2009 It's easier to add/remove members in an LLC than it is shareholders in a Corporation. Although the costs to maintain are approximately the same, record keeping and reportin requirements are a bit less restrictive with an LLC Link to comment Share on other sites More sharing options...
Dwight Drane Posted August 20, 2009 Share Posted August 20, 2009 Obama's gonna hunt you down...either way! I'm S-Corp myself, but LLC when involved with others. You save employment tax when S-Corp. I'm pretty sure an LLC you have to pay on your entire intake, but in an S-Corp you pay yourself a "reasonable" salary and the rest passes through. I am told that 40% is usually a safe salary to take. LLC is more flexable though when dealing with others. Link to comment Share on other sites More sharing options...
Pine Barrens Mafia Posted August 20, 2009 Author Share Posted August 20, 2009 It's easier to add/remove members in an LLC than it is shareholders in a Corporation. Although the costs to maintain are approximately the same, record keeping and reportin requirements are a bit less restrictive with an LLC So it's not as simple as selling shares in the Corp. to bring in a partner or raise capital? Link to comment Share on other sites More sharing options...
Cynical Posted August 20, 2009 Share Posted August 20, 2009 I'm posing a question to you folks to get some clarification on the advantages of an LLC versus a S-Corp. Does one of those entities hold an inherent advantage over the other when it comes to personal asset protection? Also, is one less costly to maintain over its lifetime when it comes to taxes and legal fees? Thanks in advance for any advice. This stuff is new to me and rather confusing. What corporate entity to pick is a pretty broad question with no right or wrong answer. IIRC, from an asset protection/liability standpoint, the C corporation is the best. From a tax and legal POV, the corporation is considered a separate entity, and what ever happens within the corporation, stays in the corporation. From a shareholders POV, any money the C corp is essentially taxed twice. The C corp has to pay quarterly taxes on its profits, and then the shareholders have to pay taxes on the same money IF they take it out as a salary or as dividends. From a record keeping POV, this type can be time consuming, both accounting and corporate records will be required. Big thing to keep in mind, while salaries will be required (and the associated payroll taxes will need to paid), the C corp can choose NOT to distribute dividends to the shareholders. There are no size limitations to a C corp. S-corps are similar to C corps, but with some differences. Both accounting and corporate record keeping will be required to maintain the separation of corporate business from the shareholders. From a tax standpoint, any profits at the end of the year are automatically distributed to the shareholders as dividends (minus any profit money taken out as a salary). Dividends are considered a "passive" income, and are subjected to income tax only. Also, due note, the IRS can decide at any time to stop recognizing the S corp. This should not be a problem as long as you play be the "rules". There are also ownership limitations with this type (how many, etc ..) Shareholders in S and C corps can sell their shares at anytime to anybody. Thus it is quite possible for somebody to want out, and they sell their shares to first person that offers reasonable money. In the end, the rest of the shareholders are stuck dealing with somebody they do not know, and possibly worse, has their own ideas on where the company should go. Both C corps and S corps are "federal" corporations. LLC's are something different. These are state creations, and are not recognized by the IRS for tax purposes. All profits earned by the LLC are distributed to the members as self employment income (unless it's a passive income stream like rental housing). This means all income is subjected to self employment taxes (you get to pay the medicare and SS payments on your 1040). This end of the year sticker shock can be avoided by making quarterly payments to the IRS. Also, I have talked a few lawyers, and most agree this is the easiest corp entity to pierce from a liability standpoint. This mainly due to the less restrictive record keeping requirements, and that has a tendency to expose the members. If you choose this type, treat it like a C / S corp, and maintain the required corporate records. Link to comment Share on other sites More sharing options...
Pine Barrens Mafia Posted August 20, 2009 Author Share Posted August 20, 2009 Also, I have talked a few lawyers, and most agree this is the easiest corp entity to pierce from a liability standpoint. This mainly due to the less restrictive record keeping requirements, and that has a tendency to expose the members. If you choose this type, treat it like a C / S corp, and maintain the required corporate records. What kind of records need to be kept? Profit/Loss? Assets/Liabilities? Receipts? What? Link to comment Share on other sites More sharing options...
Cynical Posted August 20, 2009 Share Posted August 20, 2009 What kind of records need to be kept? Profit/Loss? Assets/Liabilities? Receipts? What? Those records are accounting records. I am talking about "Articles of Incorporation", notices for shareholder and director meetings, minutes of the shareholders and directors meetings, loan papers, stock certificates issued and to whom, etc ... Yeah, these are boring and somewhat tedious to keep, but can be the difference when the IRS or some lawyer comes snooping around. I use this book: Linky. The writer does a great job of informing you what to record and what to keep. The book even comes with templates for all the documents you will need. Link to comment Share on other sites More sharing options...
Pine Barrens Mafia Posted August 21, 2009 Author Share Posted August 21, 2009 Those records are accounting records. I am talking about "Articles of Incorporation", notices for shareholder and director meetings, minutes of the shareholders and directors meetings, loan papers, stock certificates issued and to whom, etc ... Yeah, these are boring and somewhat tedious to keep, but can be the difference when the IRS or some lawyer comes snooping around. I use this book: Linky. The writer does a great job of informing you what to record and what to keep. The book even comes with templates for all the documents you will need. How exactly do you keep meeting records when you yourself are the sole member of an LLC? <transcript> This meeting will come to order.... Self, how are we doing? Great, self! What's on the docket today? Well, self, I was thinking about purchasing the property at 123 Elm Street. Sounds like a good idea, self! Meeting adjourned! </transcript> All kidding aside, with a corporation I know you need annual meetings. Is it the same with an LLC? My neighbor has an LLC and he meets "officially" with his partner once a year over beers. But if i don't have a partner, then how do I stay compliant record-wise? Thanks for the book recommendation, though, I'll have to check that out. Link to comment Share on other sites More sharing options...
rockpile Posted August 22, 2009 Share Posted August 22, 2009 I took the short route and used a DBA only. Link to comment Share on other sites More sharing options...
Cynical Posted August 23, 2009 Share Posted August 23, 2009 How exactly do you keep meeting records when you yourself are the sole member of an LLC? As stupid and obvious as it sounds: The same way you would if you were NOT a sole member LLC. <transcript> This meeting will come to order.... Self, how are we doing? Great, self! What's on the docket today? Well, self, I was thinking about purchasing the property at 123 Elm Street. Sounds like a good idea, self! Meeting adjourned! </transcript> I agree, it does look retarded. But in a way, that's pretty much what you do. The big thing to keep in mind here, is that corporate records are the only way to show the separation between the members (shareholders) and the company. It makes no difference if it's a 1 member/shareholder or 35 members/shareholders organization. And from asset/liability protection POV, you want that separation to be big as possible. All kidding aside, with a corporation I know you need annual meetings. Is it the same with an LLC? No. This is one reason why LLCs are less restrictive than corps. And this is how most small LLCs get into major trouble. Think of why records should be kept. You want to create a separation between you and the company. Without that separation, you might as well pull your pants down, bend over, and say "Thank you, sir. May I have another?" My neighbor has an LLC and he meets "officially" with his partner once a year over beers. But if i don't have a partner, then how do I stay compliant record-wise? Again, the same way as your neighbor. You could make a major business decision while driving down the highway. Just make sure it gets properly "documented" (Obviously, you would not say the meeting took place while driving in your car). Link to comment Share on other sites More sharing options...
Recommended Posts