Corporations and LLC's
Michigan Lawyers & Attorneys is ready to serve your legal needs when you are ready to set up your business as a Corporation or Limited Liability Company (LLC). When establishing a corporation, there are two different types of corporations you can charter, with major differences and advantages to each. Setting up a smaller business as an LLC can offer you important protection against liability in the event of disputes with customers or vendors. Before you decide which type of business entity to establish, it is essential that you have expert legal, accounting and taxation advice on which type of legal setup is best for your particular business operation. We will be glad to sit down with you and advise on which particular business entity is best for your business. Let's take a closer look at each.
Different Types of Corporations
When you establish, or charter a corporation it becomes an actual legal entity, separate from its shareholders. In the eyes of the law it is perceived as a fictional person or legal person, in contrast to a real or natural person. The activities and operations of a corporation, including its assets, expenses, sales and liabilities, are viewed as separate from those of its shareholders.
Because of this separation, the shareholders of a corporation cannot be held liable for the activities or liabilities of the corporation. This is commonly referred to as the "Corporate Shield" and protects the shareholders from having any of the debt or liabilities incurred by the corporation being transferred to them.
There are two main types of corporate structures or entities, C Corporations and Sub-Chapter S Corporations (S Corporations). As far as the name of a corporation, it can be structured in various different ways (i.e. XYZ Corp., XYZ Inc., XYZ Ltd., etc) no matter what type of corporation is chartered. Both types of corporate setups have specific advantages and protections, so it is important to know the differences of each.
The Difference Between C and S Corporations
When you first form a corporation in any state, it is always initially chartered as a C Corporation. There is some confusion with some people thinking you can initially set up as an S Corporation; this is not true. You must first set up a C Corporation then convert to an S Corporation only after all the shareholders agree to seek the special pass-through taxation, by filling a Form 2553 with the IRS requesting S Corporation status. This can be done immediately after chartering the corporation, which is what may confuse some people.
What is a C Corporation?
With a C Corporation, the corporation is chartered and the corporation itself pays the taxes on its profits. Shareholders are protected from any liabilities, debt or lawsuits the corporation itself may incur. However, in a C Corporation, when the shareholders receive dividends on those profits, they are also required to pay personal income tax on the same profits the corporation has already paid taxes on. This is often referred to as "double taxation" and this is what can be avoided by converting to an S Corporation with the pass-through taxation status.
What is an S Corporation?
An S Corporation is a C Corporation that has elected to file for Sub-Chapter S Corporation status. This can be done any time after the corporationhas been chartered. An S Corporation must file a tax return with the IRS for informational purposes, but the corporation itself does not pay any corporate taxes on the corporation's income. The individual shareholders are responsible to pay their own taxes on whatever income they receive from their portion of the profits of the corporation. Another major advantage to an S Corporation is that it provides much the same liability protection for both the shareholders and officers of the company as a C Corporation or an LLC.
S Corporations are widely used today because of these advantages, but actually, many people feel they are overused, as they were in essence the precursor to LLC's. LLC's now provide essentially the same setup and protections as S Corporations. S Corporations are usually used to establish very large companies with many employees, while LLC's are typically established to offer the same advantages to small businesses with just a few employees or even single-owner businesses.
A Limited Liability Company is legally not a partnership or a corporation, although many people mistakenly refer to LLC's as Limited Liability Corporations, they are in fact established as a company, not a corporation. In an LLC the owners are not considered partners or shareholders,they are all considered as being individual members of the LLC.
An LLC may have just one or as many members as it wishes to have. An LLC is established by filing Articles of Organization and any other required paperwork for the state you are in, usually with the Secretary of State of the state the LLC is established in. While you may find software available to set up an LLC, if you do something incorrectly you could jeopardize the liability protection your LLC provides. Michigan Lawyers & Attorneys will make sure your LLC is established correctly and legally, and all the members of your LLC are completely protected.
LLC's offer the same liability protection to the members of the LLC as a corporation offers to its officers, partners and shareholders. The members of the LLC cannot be held liable or responsible for any of the debt or liabilities that may be sought against the LLC. A member's assets are viewed as totally separate from that of the LLC, and because the members cannot be found personally liable for the LLC's debts, their assets cannot be seized to satisfy any debt of the LLC.
LLC's are set up similarly to, and offer pretty much the same tax advantages as, a partnership. The profits of the LLC are not taxed, the LLC itself pays no taxes, but it is up to the individual members to pay the income taxes on whatever profits they gain from the LLC.
Please feel free to contact us today so we can help give you the peace of mind that comes with knowing you have Michigan Lawyers & Attorneys representing and protecting your growing business.