|
Incorporation: A primer
|
 |
February 4, 1998: 3:44 p.m. ET
A look at differences between a 'C' corporation, 'S' corporation and LLC
|
NEW YORK (CNNfn) -- Experts say incorporation can help small-business owners do such things as ease succession planning or limit lawsuit and debt liability.
However, there are three main forms of incorporation -- "C" corporations, "S" corporations and "limited-liability" corporations (LLCs) -- each with their own strengths and weaknesses.
Here is a brief look at each one.
'C' corporations
Most large businesses like General Motors or IBM are "C" corporations, but smaller firms sometimes choose this form as well.
Whether publicly traded or not, "C" corporations divide ownership up between investors by giving out stock.
Their investors enjoy liability limited to cover only investment in the company, not personal assets like homes or cars.
A "C" corporation's owner can also deduct 100 percent of his or her own health-insurance premiums, compared to only 45 percent in the 1998 tax year for those who operate a LLC, "S" corporation, partnership or sole proprietorship.
Additionally, "C" corporations can often attract new investment more easily than businesses organized under other corporate structures, such as the LLC form.
Susan Jacksack, senior writer/analyst with CCH Inc.'s Business Owner's Toolkit, said that's because a "C" corporation can sell standard stock, whereas an LLC must give new investors "units" -- "something some potential investors are uncomfortable with."
Lastly, Jacksack said "C" corporations can offer more options for estate planning.
"With a 'C' corporation, you can easily give different heirs different amounts of stock, or different type of stock -- voting shares to one person, non-voting shares to another," Jacksack said. "There's much more flexibility."
On the down side, critics say the Internal Revenue Service taxes "C" corporations' profits twice -- once in the form of corporate income tax, a second time in the form of personal income taxes assessed on dividends investors receive from the company.
'S' corporations
"S" corporations are sort of a cross between a "C" corporation and a sole proprietorship, or unincorporated business.
By law, an "S" corporation can only have 75 shareholders or less, and all investors must consent to the "S" corporation form.
Basically, the "S" corporation offers investors the same limited liability as a standard corporation, but without the alleged double taxation of profits.
That's because like sole proprietorships, "S" corporations do not pay taxes as a company.
Rather, shareholders report the corporation's gains or losses on personal income-tax returns.
LLCs
Like "S" corporations, LLCs offer a "C" corporation's liability limits, but a sole proprietorship's tax treatment.
However, CCH's Jacksack said LLCs offer more flexibility than "S" corporations.
For instance, she said that while "S" corporations require 100 percent equal treatment of all shareholders, LLCs can treat each investor differently -- something that can make attracting partners easier.
"Let's say you have three people investing in a business for different reasons," she said. "One wants to manage it, another is rich and wants tax losses, while a third wants cash flow. With an LLC, these three don't have to be equal owners. The one who wants tax losses could get a stake that offers, say, 25 percent of the losses but only 10 percent of the profits."
Additionally, LLCs do not have to hold annual meetings or take formal minutes of meetings, something "S" corporations do.
Finally, Jacksack said courts have not fully settled case law on LLCs, leaving more "gray areas" that businesses can interpret however they want.
Unfortunately, she said not all states allow businesses with only one owner -- no partners -- to take the form of LLCs.
'How well do I know my partners?'
Overall, Jacksack said the choice of which corporate form to use often comes down to one question: "How well do I know my partners?"
"If you know and trust them very well, the flexibility of an LLC or 'S' corporation may be best for your business," she said. "If you don't, you might prefer the structure of a 'C' corporation."
|
|
|
|
|
 |
|
