Warning for anyone reading. There is a lot of wrong information in this thread as well as the OP. If you seek incorporation guidance, consult a professional attorney and CPA.
LLC vs. S-Corp vs. C-Corp
81–88 of 88 posts
Re: LLC vs. S-Corp vs. C-Corp
#82This 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…
> Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and the LLC can be liable for Founder's personal debts This is not true. A single-member LLC gets the benefit of the personal liability shield. However, as with any limited liability form, you can get the liabilit…
>Source: Advising Small Business by Steven Alberty, Section 7:17.
Not to be condescending but good luck citing that in Court.
>>Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and "the LLC can be liable for Founder's personal debts"
Re-read what you quoted, specifically focus on, "the LLC can be liable for Founder's personal debts". Your response: This is not true. A single-member LLC gets the benefit of the personal liability shield. Allow me to return favor and say "this is not true." While the Owner of a single member LLC may be protected against the LLC liabilities, that same LLC can be liable for the personal debt/judgments of the single member Owner.
The Florida Supreme Court recently issued the Olmstead v. Federal Trade Commission case. The case's holding is that F.S. 608.433 (4) allows a court to order a debtor to surrender "all right, title, and interest" in the debtor's single-member LLC to satisfy an outstanding judgment, unlike many other states where the sole remedy is a charging order.
Re: LLC vs. S-Corp vs. C-Corp
#83This 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…
>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.
I would have simply said read the reply to the post above, but your so out of line that it needs to be addressed. Your copy/paste "analysis" only examines liability of the single member Owner for the LLC liabilities. What about the company being liable for the owner's liabilities? If you are a single member owner and have personal debts/judgments, the debtors/judgment holders can not only take economic interest in your business but actual equity (ownership).
"it's got so many basic errors that it would constitute actionable legal malpractice." First, you clearly do not know the elements of legal malpractice. Second, if you actually read my post, I made it clear a single member Owner is protected from LLC liabilities.
Any thing else you think is an error?
The Florida Supreme Court recently issued the Olmstead v. Federal Trade Commission case. The case's holding is that F.S. 608.433 (4) allows a court to order a debtor to surrender "all right, title, and interest" in the debtor's single-member LLC to satisfy an outstanding judgment, unlike many other states where the sole remedy is a charging order.
Re: LLC vs. S-Corp vs. C-Corp
#84This 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…
> Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and the LLC can be liable for Founder's personal debts Is this actually true? I keep reading stuff like this on the Internet, but the corporate law textbook "corporations" by Alan Palmiter indicates otherwise. It…
Olmstead v. Federal Trade Commission
http://www.floridasupremecourt.org/decisions/2010/sc08-1009....
Re: LLC vs. S-Corp vs. C-Corp
#85Earlier quoted context omitted.
'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.
Thank you so much, I posted like 5 times about this nuanced point in the law, everyone jumped all over it down to calling it legal malpractice. You seem to be the only person to make the distinction between: Company liable for Owner Debts vs. Owner Liable for company debts
Re: LLC vs. S-Corp vs. C-Corp
#86Earlier 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 acknowledged your point in my post, a single member LLC Owner is protected from the liabilities/debts of the LLC. Consider the distinction I made that you missed - where the single member LLC lacks protection - the LLC can be liable for the personal debt/judgments of the single member LLC Owner.
In contrast, multi-member LLCs and Corporations (C or S; single shareholder or multiple shareholders) are protected from the personal liabilities/debts of Owners. In practice, if Person A owned Google Stock A's debtors can not go after Google and Google's assets to satisfy the debts; however, if A is also the Owner of a single member LLC those same debtors CAN get a charging Order, Economic Interest, or foreclose (take ownership) of the single member LLC and/or its assets.
See: Olmstead v. Federal Trade Commission http://www.floridasupremecourt.org/decisions/2010/sc08-1009.....
Re: LLC vs. S-Corp vs. C-Corp
#87Earlier 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.
This is absolutely false, making more money can make you subject to the AMT (and potentially a higher marginal tax rate), but you will never be in a situation where if you make an extra $1000 you'll owe an extra $1001 in taxes.
Re: LLC vs. S-Corp vs. C-Corp
#88One 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 manu…
I was given the advice I repeated above by an accountant a while ago. Admittedly, I don't recall the reasoning as clearly as I did when first told, but I think the basic idea is that it's more tax efficient to reinvest profits into a C corporation than a partnership or other pass-through entity.
Let's puzzle it out. C corporation math:
$1 revenue in let's assume a 50% operating margin, gross profit on $1 of revenue = $0.50 throw in another 10% for SG&A (sales, general, and administrative -- stuff your company does that isn't cost-accounted to production), we now have $0.40
Delaware has an 8.7% corporate income tax, reducing our $0.40 to 36.52 cents of free cash, which can be paid out to investors as a dividend or retained in the company for future growth.
If paid out, qualifying dividend tax would apply, leaving our investor with about 31 cents of profit. If kept in the company, shareholders would have 36.52 cents to reinvest.
Pass-through math: $1 revenue in Net profit: 0.40 (same as above)
Irrespective of whether profit is distributed or retained, and assuming a 28% individual marginal rate for partners, the partnership is left with 28.8 cents of post-tax profit that they can reinvest or distribute (take out for themselves). A few points from this example:
It's basically a wash tax-wise (28.8 cents vs. 31) if the profits are distributed. If profits are reinvested, the C corp has 36.5 cents of the original dollar left vs. 29-31, which will compound very significantly over time. So for a business that pays out most of its profits each year and doesn't reinvest (e.g. typical consulting company), it's likely better and simpler to use a partnership, whereas the C corp is better served for "asset heavy" companies with things that depreciate over time.
Software is tricky because even though it's an "asset" in every sense of the term ("probable future economic benefit", can be sold, etc.) most accounting systems don't recognize it as such. You should really get a CPA's advice on this, but I think the bottom line is, if you're going to (1) earn profit (most startups don't for a long time) and (2) reinvest a lot into the company, you're likely better off with a C corp, otherwise, for a cash business where most profits are paid out right away (law firm, ad agency, medical practice) you're better with a passthrough entity.
Hope this helps