Tutorials
Forming a Corporation or LLC properly is an important step towards your success. The benefits afforded Corporations and LLCs aren't available to sole proprietors, partnerships or dba's. Learn how to legitimately protect your family’s assets, increase your profits and lower your exposure to lawsuits through the power of privacy.
Basic Business Structures
Sole Proprietor
- A sole proprietorship is considered the simplest form of doing business. In most cases, you simply obtain your business license and you are in business.
- Income is taxed at your individual level. Sole proprietors are also subject to a 15.3% self-employment tax on all income earned from the business.
- Zero asset protection. As a sole proprietor there is no separation, you are the business. This means if your business gets sued, your personal assets are at risk. If you get sued, your business assets are at risk.
- More info...
Partnership
- A Partnership is considered the riskiest form of doing business. Typically, two or more people get together to conduct business or purchase an asset.
- Gains or losses of the Partnership are passed through to the individual partners and are included on their individual tax returns.
- In a Partnership all parties are liable for the company’s actions, and personal assets can be at risk to satisfy a judgment. In some cases, an individual partner’s personal liability could “flow through” the partnership to the other partner(s).
- More info...
Corporation
- A Corporation is a separate legal entity that is created by statute and regulated under the laws of the state in which it was formed.
- A Corporation is owned by shareholder(s). Shareholders can be individuals or other entities such as another Corporation, Limited Liability Company, (Family) Limited Partnership or a Trust.
- Shareholders of a Corporation cannot be held personally liable for the actions of the business except in the case of outright fraud. If the Corporation is properly established and maintained, the individual shareholders are not personally liable for the losses of the business and creditors may only look to the Corporation and the business assets for payment.
- A Corporation may choose to have multiple classes of stock.
- A Corporation is taxed separately from its owners on its profits.
- Profits of the Corporation may be distributed to its shareholders (issue dividends) where the income would be taxed again as passive income. This would result in what’s commonly called “double taxation”.
- A Corporation is required to observe corporate formalities to ensure the integrity of the “corporate veil”. Corporate formalities consist of the holding and documentation of all company meetings, the formal approval of major corporate decisions through resolution and the approval of the board of directors, officers and shareholders.
- More info...
"S" Corporation
- All "S" Corporations start out as a regular Corporation. By filing form 2553 with the IRS, you are electing that the Corporation be treated like a partnership for tax purposes. Profits and losses are “passed through” to the shareholders in proportion to their percentage ownership.
- "S" Corporations have all the limited liability protection of a regular Corporation. However, they are not allowed many of the same fringe benefits that regular Corporations do.
- "S" Corporations are restricted to no more than 75 shareholders; Shareholders must be U.S. citizens and natural persons (or certain types of Trusts);
- Allowed only one class of stock;
- Like the Corporation, the "S" Corporation is required to maintain formalities to ensure the integrity of the “corporate veil”.
Limited Liability Company
- Limited Liability Companies (LLC) are a hybrid between a Corporation and a Limited Partnership and combine the best of both. LLCs provide the liability protection of a Corporation with the pass-through taxation of a Partnership.
- LLCs are very popular due to their flexibility in management, and the personal liability protection offered to its managers and members.
- LLCs don’t have the restrictions on membership that an S-Corporation has on shareholders. LLCs also allow members to participate in the management of the LLC without losing their liability protection (unlike the General Partner of a limited partnership, which has unlimited liability).
- LLCs have the greatest flexibility in regard tax classification with the IRS and to the distribution of profits and losses. Unlike the “S” Corporation, distribution is not necessarily based on percentage of ownership.
- Members of LLCs have charging order protection against their membership interest from personal lawsuits.
- More Info...
Limited Partnership
- Controlled (managed) exclusively by the general partner(s) who are elected by the limited partner(s).
- General Partner(s) have complete control in regards to the management of the LP but have no liability protection from judgments against the LP or lawsuits from the Limited Partners (owners).
- Limited Partners have no control of the LP and therefore have limited liability from judgments against the LP.
- Partners in a LP have charging order protection against their interest from personal judgments.
- More Info...
- Allowing their corporation to go into default with the Secretary of State (SoS).
- Failure to maintain state fees will cause the charter to be revoked and with it any protection and tax advantages it normally provides.
- Commingling funds. Using the business funds for personal expenses.
- The Corporation’s bank account and assets are not to be treated as if they were personal assets. They must remain separate at all times.
- Not documenting major business decisions with properly drafted formalities.
- It is the directors’ function to make major decisions for the benefit of the Corporation on behalf of the shareholders.
- Not holding (and documenting) annual and/or necessary meetings per the corporate by-laws.
- Directors and shareholders must meet annually at a minimum. Failure to make proper notification or waiver would be a violation of the by-laws.
- Not issuing stock and maintaining a stock ledger.
- All Corporations and LLCs have owners and they must be properly documented within the company’s record book showing amount of ownership and their capital contribution.
- Personally signing documents, agreements, etc. on behalf of the corporation.
- Without the proper officer title attached a signature could be misconstrued as a personal guarantee.
- Undercapitalization.
- Failure to supply the Corporation with enough capital or assets to effectively operate in a reasonable and ordinary manner.
- Commingling dangerous and safe assets in one corporation.
- If the corporation is attacked, all the assets inside the corporation are at risk of seizure from a judgment. Always separate assets from risk.
- Dissolving the Corporation prior to an impending lawsuit…
- Or worse, after a judgment has been rendered. This would remove any protection the corporate veil provided, possibly placing all liabilities and tax penalties on the shareholders.
