Business Formation Solutions

A limited liability company (LLC) is a hybrid, combining the most sought after characteristics of a corporation (credibility and limited liability) with those of a partnership (flexibility and pass-through taxation). Plus, an LLC is not saddled with many of the reporting and documentation formalities that a corporation faces. For example, an LLC does not have to hold regular, annual meetings. These characteristics make it an extremely popular business structure.

Every business owner should consider operating the business in a manner that shields the owner’s personal assets from the liabilities, debts and judgments of the business. The LLC may be preferable for business owners who desire a great deal of flexibility in dividing the profits and losses of the business and in setting the ground rules for how the business operates.

Yes, one of the characteristics that an LLC shares with a corporation is “unlimited duration.” If a sole proprietor or a general partner dies, then the business or partnership ceases to exist. This is not the case with an LLC. The ownership can change hands and the LLC will continue. There are a few states where the death of all members will terminate an LLC, but in most cases the operating agreement can override this default provision. Also, although it can have unlimited duration, the formation documents or the operating agreement can specify when the LLC will terminate, based upon the passage of time or the happening of an event.

Every state now allows for a single-member LLC, which makes it an ideal way for a sole proprietor to protect his or her personal assets. Also, there is no upper limit on how many members an LLC can have—although the larger the number, the more unwieldy operations and governance can become.

To form an LLC, you must file Articles of Formation with the state you selected as your formation state. The Articles of Formation sets forth basic information about the LLC, such as its name, principal address and the name and address of its registered agent. Some states require additional information, such as whether the LLC will be member-managed or manager-managed; others require the names of the initial members. In addition to filing this document, you must also pay the filing fees. Some states, such as New York, also require publication of a notice in a newspaper prior to the formation of the company.

Yes, you must have a registered agent for your LLC. You must appoint your initial registered agent as part of your formation paperwork. If you do business in any states other than your formation state, you will also have to have a registered agent in each of those states. Plus, you must maintain a registered agent in each state until you dissolve the company or withdraw from the state.

No, you do not need an attorney to form your LLC. You can file the paperwork yourself, or you can use a professional business formation service, such as CT Corporation. However, you may wish to obtain legal advice regarding the provisions of the operating agreement and the tax consequences.

There is no “one best state” to form an LLC. In general, most small businesses opt to form the LLC in the state where the owners reside or where the company is doing business. This cuts down on the initial costs, as well as on-going costs and compliance responsibilities. If you form your company in a state other than the one where you are doing business, you will immediately need to apply for a certificate of authority to operate in that state. And, going forward, you will have to file annual reports (and pay the annual report filing fees) in both the formation state and the state where you are registered to do business. However, if you know that you will be operating in multiple states immediately, or if you plan on utilizing specialized tax or asset protection structures, such as a series LLC, then you may wish to form your company in a business-friendly state, such as Delaware or Nevada. Learn more about the best state in which to form an llc.

There may be tax benefits in forming an LLC, but realizing the maximum benefit will require working with an accountant or other financial professional. By default, an LLC is a “pass-through” tax entity. This means that it does not pay any taxes on company profits and does not realize any benefits from losses and tax items. All these tax attributes are divided among the LLC members based on the operating agreement. While this can reduce income tax, it may increase the amount of employment tax liability owed by a member. All pass-through income is subject to self-employment tax. A tax professional may recommend electing to be taxed as an S corporation in order to reduce this aspect of taxation.

Yes, although an LLC is a disregarded entity for tax purposes, it is very much a separate entity for state law purposes. This means that it can be sued. It also means that the LLC can file lawsuits in its own name, can enter into leases and agreements, open bank accounts and purchase real estate and other property.

Yes, most states permit the conversion from one form of business to another. CT Corporation’s business specialists can walk you through the process, which varies based on your current form of business, your formation state, and the other states where you are registered to do business.

You can change the legal name of your LLC by filing a Certificate of Name Amendment with your state of formation. (You will need to file a similar certificate in every state where you are currently authorized to do business.) Another option—and one that might not involve filing in multiple states—is to file a “doing business as” (DBA) certificate in the state where you wish to use a different name.

Both an LLC and an S corporation are considered “pass-through” tax entities. That means the company does not pay any tax on its taxable income. Instead, the income, losses, and tax items (such as depreciation deductions) are passed through to the members or shareholders, who report these items on their personal tax returns. One significant difference is that all of the LLC’s profits are considered the self-employment income of the members—and the members are liable for self-employment tax on their shares. In contrast, an S corporation can pay a salary to the owners who operate the business and pay the remainder of the profits to them as dividends. This greatly reduces the amount of employment tax liability and can result in substantial savings. Another difference between an S Corp and LLC is that an LLC can allocate profits, losses, and tax items however the members agree. A corporation must allocate these items based strictly on the number of shares owned.

Unlike an LLC and an S corporation, a C corporation is a separate tax-paying entity. A C corporation reports its own income, expenses, losses, and tax items on its own return and pays taxes based on the corporate tax rate. Any money that a shareholder receives is distributed as salary or dividends. Profits distributed as dividends are actually taxed twice: once as corporate income on the corporation's tax return and, again, as income on the shareholder's tax return. However, there are tax planning strategies—such as accumulating earnings—that are not available to an LLC or an S corporation that may offset concerns regarding “double taxation of dividends.” Talking with a tax advisor can help you sort through the options and determine what is best for your circumstances.

PLLC is the abbreviation for “Professional Limited Liability Company.” In most states, licensed professionals—such as attorneys, doctors, accountants, psychologists, architects or engineers—cannot form a regular limited liability company. In all states but California, these professionals are permitted to form a PLLC. The formation process is similar, but in virtually all states, there are restrictions imposed on who can be members, what name can be used and what must be stated in the formation documents. (In general, forming a PLLC will shield members from ordinary business debts, but will not protect their personal assets from malpractice claims.)

A C Corporation (also known as a “C Corp”) is a legal entity that protects the owners’ personal assets from creditors. It can have an unlimited number of owners and multiple classes of stock. Unlike an S Corporation or an LLC, it pays taxes at the corporate level.

You must file Articles of Incorporation with the state where you’re based and designate a Registered Agent to receive official and legal documents on behalf of your business. You must also obtain an employer ID number (EIN), which is often required for tax purposes and business banking.

Yes, you can convert an S Corporation to a C Corporation or an LLC should your business needs change. The decision to convert must be approved by the shareholders. Conversion planning depends on your company’s specific circumstance, so be sure to discuss your plans with a legal professional.

C Corporations need to have shareholders, directors, and officers. They must hold director and shareholder meetings, keep corporate minutes, and allow shareholders to vote on major corporate decisions. Your C Corporation also needs to file annual reports and maintain good standing in state(s) where you’re incorporated.

While most of the S Corporation’s income, losses, deductions, and credits are passed through to the shareholders for federal tax purposes, the corporation may be liable for tax on certain passive income and built-in gains.

Also, not every state follows the federal rules when taxing S corporations. Some, such as California and Illinois, impose a tax at the entity level.

Every business owner should consider operating the business in a manner that shields the owner’s personal assets from the liabilities, debts and judgments of the business. An S Corporation may be the best choice if the owners want to pay both salary and dividends in order to lighten their overall tax burden.

Unlike regular corporations, S Corporations must follow strict rules regarding who can be a shareholder. Only individuals, certain trusts, and estates can be shareholders. Partnerships, corporations and non-resident aliens cannot be issued shares.

An S corporation cannot have more than 100 shareholders although certain family members can be counted as a single shareholder.

The first step in creating an S corporation is to incorporate by filing Articles of Incorporation with the state selected as the formation state. Once the Articles of Incorporation are approved by the state, the corporation files Form 2553, Election by a Small Business Corporation, with the IRS. This form must be signed by all the shareholders.

A corporation can elect to become an S Corporation at any point during its life, but most elect the status beginning with their first tax year. To make the election for the first year, Form 2553 must be filed within two months and 15 days after the beginning of the business’s tax year. An election for the next year can be filed at any time during the preceding year.

Most states accept the federal election statement for state tax purposes. However, a few states, such as New York, require a separate state election.

Yes, you must appoint a registered agent for your S Corporation. All the state requirements imposed on regular for-profit corporations apply to S corporations. The initial registered agent is appointed on the Articles of Incorporation. If you do business in any states other than your formation state, you will need to appoint a registered agent in each of those states. And, you must maintain a registered agent in each state until you dissolve the company or withdraw from the state.

No, you do not need an attorney to form a corporation and elect to be taxed as an S Corporation. You can file the paperwork yourself or use a professional business formation service. However, you may wish to obtain legal advice regarding the tax consequences of an S corp election.

There is no “one best state” to form any corporation. In general, most small businesses incorporate where the owners live or where the company is doing business in order to reduce initial and on-going costs and compliance responsibilities. If you incorporate in a state other than the one where you are doing business, you will immediately need to apply for a certificate of authority to operate in that state (also known as "Foreign Qualification"). And, going forward, you will have to file annual reports (and pay the annual report filing fees) in both the formation state and the state where you are registered to do business.

Both an LLC and an S Corporation are considered “pass-through” tax entities. That means the company does not pay any tax on its taxable income. Instead, the income, losses and tax items (such as depreciation deductions) are passed through to the members or shareholders, who report these items on their personal tax returns.

One significant difference is that all of the LLC’s profits are considered the self-employment income of the members—and the members are liable for self-employment tax on their shares. In contrast, an S corporation can pay a salary to the owners who operate the business and pay the reminder of the profits to them as dividends. This greatly reduces the amount of employment tax liability and can result in substantial savings.

Another difference between an S Corp and LLC is that an LLC can allocate profits, losses and tax items however the members agree. A corporation must allocate these items based strictly on the number of shares owned.

A C Corporation is a separate tax-paying entity, unlike an LLC and an S Corporation. A C Corporation reports its own income, expenses, losses and tax items on its own return and pays taxes based on the corporate tax rate. Any money that a shareholder receives is distributed as salary or dividends. Profits distributed as dividends are actually taxed twice: once as corporate income on the corporation's tax return and, again, as income on the shareholder's tax return.

However, there are tax planning strategies—such as accumulating earnings—that are not available to an LLC or an S Corporation that may offset concerns regarding “double taxation of dividends.” Talking with a tax advisor can help you sort through the options and determine what is best for your circumstances.