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LLC vs. S-Corp vs. C-Corp

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Re: LLC vs. S-Corp vs. C-Corp

#71

Post by NoPiece »

count wrote: post #44
will_brown wrote: post #32

Earlier quoted context omitted.

With liability protection you want two forms of protection. The Founder(s) needs to be personally protected from the company liabilities, and you want to company to remain protected from the liabilities of the Founder(s). For example if you form a "single member" LLC, or a LLC with 1 owner, because LLCs are partnerships Court's will not protect the LLC from the single Owner's liabilities because there are no partners…

'because LLCs are partnerships' huh? Single Owner LLCs exist specifically to protect the personal assets of a owner from the creditors of the LLC, IFF the LLC was the signatory on the debt, rather than the owner (if you have to provide an SSN to secure the debt, it's probably in your name personally, rather than in the companies name). Courts will protect the owner, as long as the owner keeps their personal finances…

I think you are misreading what he wrote. With a single owner LLC, the owner is protected from LLC liability, but the LLC is not protected from owner liability. Search for "LLC charging order protection" for more info.

Re: LLC vs. S-Corp vs. C-Corp

#72

Post by Nrsolis »

eli wrote: post #65
Nrsolis wrote: post #53

Earlier quoted context omitted.

NOPE. C-corp taxes are subject to all sorts of rules. You can't do C-corp taxes on your own except in the most simple of circumstances. You definitely need a CPA (and a good one) if you're going this route.

I didn't mean so simple you could do yourself; I meant simple compared to S-Corp.

A C-corp and an S-corp are equivalent in all but a few ways:

An S-corp is restricted in the total number of shareholders, and the classes of stock. It also can't have retained earnings. That's it.

S-corps aren't really popular any longer. Everyone who might have benefited from an S-corp is choosing to form LLCs instead. Less paperwork. Less formality. More flexibility. It's essentially a partnership with the limited liability of a corporation.

Heck, even AOL was an LLC for a while.

Re: LLC vs. S-Corp vs. C-Corp

#73

Post by [deleted] »

Nrsolis wrote: post #55
ksherlock wrote: post #6

It's a little more complicated than that: > An LLC with either a single member or more than one member can elect to be classified as a corporation rather than be classified as a partnership or disregarded entity under the default rules discussed earlier. File Form 8832, Entity Classification Election, to elect classification as a C corporation. File Form 2553, Election by a Small Business Corporation, to elect classi…

Nobody does this. You give up the benefits of pass-thru taxation that you GAIN with an LLC. You're essentially volunteering to be taxed TWICE if you make this election.

[deleted]

Re: LLC vs. S-Corp vs. C-Corp

#74

Post by gamblor956 »

will_brown wrote: post #29

This is not legal advice. The article focuses on a very small tax issue that should not be determinative of business structure. The way a Start-up should decide to form a business generally should be as follows: 1. State - generally always choose the State the Founder is physically located. If you choose Delaware or another State you are not physically located, you must "qualify" your business to do business in every…

Agreed, it's a good thing the article is not legal advice because it's got so many basic errors that it would constitute actionable legal malpractice.

To clarify: an LLC means a "limited liability company" so the owners have limited liability. Their loss is limited to their investment. If the corporation's debts/losses exceed their investment, they don't have to pay those debts/losses out of pocket. The exception is the "piercing the veil" doctrine, which applies where the LLC is not being run as a separate business entity, i.e., it is financially or legally not treated as an independent entity by its investors, i.e., because they never have organizational meetings or they do not maintain separate bank accounts for the LLC. This risk is greatest with single-person LLCs, but can happen with any LLC.

Re: LLC vs. S-Corp vs. C-Corp

#75

Post by [deleted] »

CamperBob2 wrote: post #33

Why does any of this matter? If you need a particular corporate structure for an equity investment or other purposes, you form a new corporation that buys the assets of the old business, and life goes on. A C Corp is absolutely nuts for anyone starting out, unless you just want to pay your taxes twice.

[deleted]

Re: LLC vs. S-Corp vs. C-Corp

#76

Post by csense »

eldavido wrote: post #24

One problem with the reasoning in this article: reinvested earnings usually don't sit on the company's balance sheet as cash -- they're reinvested into the business as wages, advertising, and other expenses, all of which reduce profit (but increase long-term enterprise value). If you own a lot of proprietary IP, go with the C corp, otherwise if you're running an asset-light cash business where most of your revenue fl…

1. Why is the C corp better for companies with a lot of proprietary IP?

2. Which way would you classify the typical software/web startup?

One of a typical web or software startup's most important assets is its product (which argues that they "have a lot of proprietary IP").

But they are also "asset-light cash business" in the sense that they don't have to have a ton of buildings or physical inventory like e.g. a manufacturing startup would, their physical footprint might consist entirely of one small leased office with a few computers.

Re: LLC vs. S-Corp vs. C-Corp

#77

Post by csense »

sellardour wrote: post #10

Firstly, I am skeptical that the author uses the word 'thru' so much. Secondly, if I were to take all the money personally, and then say, buy something useful for myself that my business could really use too, instead of retaining money on paper, does that not work?

If you do this, there's a good chance you're throwing away the main benefit of having a corporation!

Specifically, "intermingling of assets of the corporation and of the shareholder" [1] is a reason that can be used in court by creditor(s) of your business to hold you personally liable for its debts.

[1] http://en.wikipedia.org/wiki/Piercing_the_corporate_veil#Uni...

Re: LLC vs. S-Corp vs. C-Corp

#78

Post by dllthomas »

cmccabe wrote: post #39
staunch wrote: post #19

Earlier quoted context omitted.

YES! It's so annoying how few people understand this. People are never "in a tax bracket" -- only money is! Your first $40k may be taxed at 10% and your next $20k may be taxed at 15% or whatever, but you are not "in a tax bracket". The idea of being "in" a tax bracket gave rise to the dumb idea that making more money can net you less after taxes, which is virtually never the case.

Sorry, but it may be dumb, but it's true. Making more money can lead to less take-home pay. One really good example is if you hit the AMT (alternative minimum tax.) "Your money" is not in the AMT-- you are. And it often means that a raise can end up costing you money. There are also similar situations where getting a job can mean losing out on welfare, leading to you actually having less money to take home.

The article said,

"So now you owe an extra 10% on your $40K salary which is $4K. And you also owe 35% on that $50k which is around $18K."

Based on the numbers, this is clearly a misunderstanding of how tax brackets work, and not anything to do with the AMT.

Re: LLC vs. S-Corp vs. C-Corp

#79

Post by jforman »

driverdan wrote: post #67
jforman wrote: post #49

Earlier quoted context omitted.

IANAL, but some basic details: There needs to be a strict separation between the corporation and the people behind the corporation. As part of this, the LLC's finances need to be kept rigorously firewalled from personal finances — never pay a corporate bill from your own pocket, for example, or vice-versa. You also need to follow the formalities of a corporation by keeping formal records (minutes, shareholder acts, e…

> There needs to be a strict separation between the corporation and the people behind the corporation. As part of this, the LLC's finances need to be kept rigorously firewalled from personal finances — never pay a corporate bill from your own pocket, for example, or vice-versa. This is true about all formal business structures. They should always be separate from your personal finances. > You also need to follow the…

> This is true about all formal business structures. They should always be separate from your personal finances.

This is more than "should." In an LLC, co-mingling finances can expose you to personal liability, which can result in personal financial disaster if you get sued.

> LLCs do not require the record keeping that corps require

We're both sort-of wrong on this one: the LLC record-keeping burden is far lower than a corporation, but the burden is not strictly limited to your list:

http://www.nolo.com/legal-encyclopedia/llc-record-keeping-ru...

...in general, the law is much more complicated than one would expect. If you want to be safe, you should either be spending time reading NOLO's documentation or money paying a lawyer.

Re: LLC vs. S-Corp vs. C-Corp

#80

Post by cmccabe »

vonmoltke wrote: post #45
cmccabe wrote: post #39

Earlier quoted context omitted.

Sorry, but it may be dumb, but it's true. Making more money can lead to less take-home pay. One really good example is if you hit the AMT (alternative minimum tax.) "Your money" is not in the AMT-- you are. And it often means that a raise can end up costing you money. There are also similar situations where getting a job can mean losing out on welfare, leading to you actually having less money to take home.

Yes, the AMT is the one case where you could end up with less take-home. Its an exception to the normal functioning of the tax code, though, and it works by prohibiting most permissible deductions. Thus, while the statement about the AMT decreasing take-home with increased is factually correct, this does not happen through the bracket system. GP was clearly addressing the misconception that people move into tax brack…

There are a ton of places in the tax code where making more money results in you keeping less of it. For example if you sell more than X dollars worth of goods on eBay, you have to start paying tax, which will cost you dear. So the jump from X to X+1 ends up costing you. I think X = $500, but maybe they changed it.

The IRS even reduces your taxes if you lose money in the stock market, if your business property depreciates, and so forth. I like to refer to those cases as "the government paying you to be a loser." Just another case where doing better means you do worse.

Let's not even try to pretend this is a fair or well-designed system. Even Warren Buffet, surely one of the greatest beneficiaries of the system, has spoken out against it.

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