Compare Nevada Corp or LLC to other Business Types
Corporations and LLCs (Limited Liability Companies) are both excellent choices for business owners looking to minimize their personal liability and build greater credibility. But each entity also offers distinct tax and business advantages. Choosing the right one depends on the specific needs of your business. Here you can learn about and compare each business entity.
Forms of Business Organization
In the United States there have been traditionally four forms of business organizations:
- Sole Proprietorship
- General Partnerships
- LLC (Limited Liability Company)
Each of these forms of business organization, as well as some of their refined variants, has its own characteristics with regard to management, liabilities, and taxes; each organizational form is discussed in terms of these important parameters. A newer form of business organization, which is becoming popular in all states, is the Limited Liability Company (LLC).
1) Sole Proprietorship
In a Sole Proprietorship, the owner is the business. As the sole owner, the sole proprietor has unrestricted freedom in the management of the business.
The Sole Proprietorship exists only for the duration of the sole proprietor's life.
The sole proprietor owns and controls all of the business assets, and he or she is personally and individually liable for all the debts of the business. If the business requires additional capital to fund its growth or expansion, the sole proprietor must arrange the funding through personal assets, or by borrowing the money, possibly pledging the business assets as collateral. The Sole Proprietorship business itself is not liable for income taxes; the sole proprietor/owner must account for any profits or losses of the business on his or her personal tax returns.
2) General Partnership
A General Partnership exists where two or more persons carry on a business for profit as co-owners. Management is typically shared between, or among, the partners, giving rise to a more complex management situation. Each partner has implied authority to bind the Partnership. While a formal Partnership Agreement is not necessary to the existence of a Partnership, common sense and good business practice indicate that a detailed, and often complex, Partnership Agreement be drafted.
The Partnership continues only so long as specified in the Partnership Agreement, or until the death, bankruptcy, withdrawal or expulsion of a partner.
To raise new capital, General Partnerships must obtain a loan, new partners, contributions by current partners or restructuring of the Partnership. Each partner bears unlimited personal liability for the debts of the Partnership. The Partnership itself is not taxed. It is a conduit through which income and other items pass directly to the partners, who report their distributive shares on their personal income tax returns. The Partnership must file a federal Form 1065 to report its profit or loss.
A special kind of partnership, the Limited Partnership, offers the principal advantages of a General Partnership plus the advantages of limited liability for the limited partners. The Limited Partnership consists of (1) one or more general partners who have unlimited liability for all obligations incurred by the partnership; and (2) one or more limited partners whose liability is limited to the extent of their capital contributions. To retain their limited liability, the limited partners must not take part in the management of the business and must not allow his or her surname to be used in the partnership name. Also, a limited partner will be liable for damages which result from claims in the partnership certificate which the limited partner knows to be false.
The Corporation is a creation of the State. It exists by virtue of compliance with applicable statutes of the particular State in which the business is incorporated. The Corporation has the following four specific characteristics:
Continuity of Life
A Corporation is a legal entity separate and apart from its Shareholders, Directors, and Officers. Shareholders (or Stockholders) are the owners of the company; it is they who provide the funding to create, sustain, and grow the Corporation. The Directors are designated by the Shareholders to provide the overall direction of the Corporation.
Typically, the "Board of Directors" sets overall Corporate policy and philosophy. Officers of the Corporation, usually but not always, consist of a President, one or more Vice-Presidents, a Secretary and a Treasurer. The officers are responsible for the day-to-day operation of the Corporation. The Corporation continues to exist, irrespective of the status of any person, so long as it continues to comply with the state corporation statutes. The Corporation continues to "live" despite the death, insanity, bankruptcy, retirement, resignation, expulsion or dissolution of any Shareholder, Director or officer.
Centralization of Management
Management of the Corporation is by its elected or appointed officers under the general guidance of the Board of Directors. Unlike the Sole Proprietorship or general Partnership, where management is by the proprietor or by all of the partners, Corporate management is consolidated in a representative person or group. The Limited Partnership is akin to the Corporation in that its management is consolidated, or centralized, in the general partner(s).
Limitation of liability is one of the main reasons for using the Corporate form of business organization. The liability of the Shareholders, Directors and officers for the debts of the Corporation is limited to the amount of their investment in the Corporation. Contrast this with the liability of the Sole Proprietor or General Partnership where the individuals themselves bear unlimited exposure to claims against the business.
Free Transferability of Interests
Free transferability of assets is illustrated every business day on the several stock exchanges and over-the-counter markets. In general, a Shareholder of Corporate stock can sell to any other entity willing to meet his price. The buyer can be a person, Corporation, Trust, Partnership, pension plan, non-U.S. citizen, non-resident alien and others. Since Shares of stock in the Corporation are securities, sales must comply with applicable securities laws. Also, where there is a Shareholder Agreement, transfers of Shares must comply with that agreement; an example is an S-Corporation agreement prohibiting sales which would terminate the Corporation's S status (such as a non-resident alien).
Many small business owners probably consider incorporating for the tax benefits. Other factors might well be more important for your small business. Such factors include income splitting, fringe benefits, and dividends from other Corporations.
4) LLC (Limited Liability Company)
The limited liability company (LLC) is not a partnership or a corporation. It is really a hybrid between the Partnership and the Corporation. It is a distinct entity created by state statute that offers business an alternative to Partnerships and Corporations by combining the Corporate advantage of limited liability with the pass-through tax advantage of a Partnership.
The structure of the Nevada LLC is extremely flexible, and is a matter of contract among its Members. The LLC is similar to (1) a General Partnership with limited liability; (2) a Limited Partnership where all owners participate in management and all have limited liability; and (3) an S Corporation without the ownership and tax restrictions. Because of the limited liability feature and the formality involved in its formation, an LLC is more nearly related to a Corporation than a Partnership. One owner/Member LLCs are generally treated the same as Sole Proprietorships. Profits are reported on Schedule C as part of your individual 1040 tax return.
Self-Employment Taxes on LLC net income/loss must be paid just as you would with any self-employment business. Multiple owner/Member LLCs are treated as a Partnership by the IRS. The tax return that the LLC completes and files is IRS Form 1065, Partnership Information Return. On this form, LLC profits are reported and allocated to each of the owners according to the LLC's operating agreement.
Each owner is given a Schedule K-1, which shows each owner's share of LLC income or loss. The owner then reports and pays taxes on this income on the owner's annual 1040 income tax return. Please note that as with a Sole Proprietorship, all profits of the LLC may be taxed to the owners, even if they are not actually distributed by the LLC. There is a possible third tax treatment that an LLC may elect if the members want pass-through taxation.
The LLC may elect to be taxed as a Corporation by completing IRS Form 8832 and checking the Corporate Income Tax Treatment box. After making this election, the LLC is taxed as a C Corporation by the Federal government. Because the Corporate income tax rates for the first $75,000 of Corporate taxable income are sometimes lower than the individual income tax rates that apply to the taxable income of non-corporate taxpayers, it is possible a net income tax savings can result from this tax election. The State income tax treatment, if any, of LLC profits typically mirrors the IRS tax treatment as discussed above. Some States have different rules and for specific information on the state rules, visit that State's web site.
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