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10 Things You Need to Know Before Starting an LLC or Corporation

3rd May 2024 | 1 Views

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Statistics from SBA indicate that small businesses make up around 99.9% of U.S. businesses and employ nearly half (47.1%) of U.S. employees. Each year new business firms open, yet many struggle to stay afloat. Data from the U.S. The Bureau of Labor Statistics indicate that around 20% of small #businesses fail within the first year. This number increases to roughly 50% by the end of their 5th year. 

 Both #LLCs and corporations (especially S corporations) surged to the forefront around the time the Small Business Job Protection Act of 1996 was implemented. This act contained a number of changes to basic corporate tax law, one of which was enabling S corporations to hold any percentage of stock in C corporations. #Entrepreneurs may be wondering what is the success rate of small business, or why small businesses fail. We’ve taken a closer look at things every entrepreneur should know before starting a business.

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  1. You’ll need a registered agent

Registered agent requirements may vary slightly from state to state, but in general the registered agent serves as a point of contact between the LLC or corporation and state government. Maintaining a registered agent is a legal requirement for incorporated businesses. When selecting a registered agent it is important to note that registered agents need to be available during regular business hours to accept service of process. Furthermore the registered agent’s address can not be a P.O. Box, for the simple reason that the state does not always deliver important documents through the mail. 

  1. Governance structure of the LLC versus Corporation may vary by state

In Delaware the corporation is structured with 3 tiers of power. There are shareholders, directors and officers. This structure is prescribed by Delaware Corporation Law which dictates the duties of each tier as well as the relationship between them. In contrast the LLC is governed by a contract between all members, namely the Operating Agreement. This document is binding on all signatories and dictates member interests, #LLC interests, capital accounts, management rights and responsibilities, allocation of profits and losses as well as dissolution procedures. There are six states that legally require LLCs to have an operating agreement, namely: California, Delaware, Maine, Missouri, Nebraska and New York. 

  1. Federal taxes for LLCs and Corporations are different

Corporations have three IRS taxation options namely: C corporation, S corporation and non-profit. C corporation is the default classification and taxes are paid on the corporation’s profits each year. A corporation can elect Subchapter S tax status within 75 days of its formation date, provided it has fewer than 100 shareholders. A subchapter S company is generally referred to as an S corporation and can provide a way to avoid double taxation. When it comes to tax classification for the LLC, filing an application for an Employer Identification Number (EIN) is a crucial step. 

  1. Privacy Differences on State Level

When it comes on the state level, LLCs have an easier time in Delaware, as the state does not require annual reports to be filed. It’s a different story for corporations though, as the annual report needs to adhere to certain requirements. One of the requirements include that all the directors names and addresses need to be listed on the annual report. This may not be appealing to those who want to keep their addresses private. 

  1. The Misconception About LLCs and Taxes

According to Megan Naasz, a Certified Public Accountant, the popular misconception around LLCs has to do with saving money on taxes. The LLC and sole proprietor are taxed at similar rates, however certain income requirements need to be met first before the LLC can be taxed as an S corp. Until then, the primary function of the LLC is the legal protection it can provide. 

  1. Ease of formation: LLC

Creating an LLC is a much simpler process than creating a corporation. LLCs are under the jurisdiction of state law, so the process of forming an LLC may differ from state to state. In most states it is required to file articles of organization with the Secretary of State, and some states allow online applications. A few states may require the additional step of filing a public notice, often in local newspapers. Normally after these steps are completed the LLC is officially formed. 

  1. Corporate Bylaws and Directors

Bylaws are the rules and internal regulations under which the corporation will operate. Some states do not require corporations to have bylaws. It is normally considered a prudent step to adopt corporate bylaws as they clarify the rights and responsibilities of business shareholders, directors and officers. Banks and creditors may ask to see the corporate bylaws to establish the legitimacy of the corporation before extending loans or opening accounts. 

  1. LLC versus Corporation if Foreign National

When a foreign national is looking to set up a business in the United States, the choice of business entity for non-residents boils down to corporation or LLC. Generally speaking, if the company will be doing business inside the United States forming a corporation could prove to be the better choice. If the company will be used strictly outside of the United States and there are no U.S. resident owners, then forming an LLC may be beneficial as it most likely won’t be subject to U.S. income tax. 

  1. S corp earnings and self-employment tax

Owners of an S corp may, in some cases, be considered employees, and if so, must be paid a reasonable salary. If one owns an LLC that is structured as an S corp, for example, it stands to believe that you’ll be paying yourself a reasonable salary. This salary will be subject to #Medicare and Social Security taxes, referred to as employee payroll taxes rather than self-employment #tax. This is different from the LLC that is taxed as a partnership or disregarded entity. In these cases all of the company’s profit is considered income, making it subject to self-employment tax. 

  1.  LLCs can be dissolved involuntarily 

There are two types of involuntary dissolution namely: administrative dissolution and judicial dissolution. Administrative dissolution is imposed by the Secretary of State. It may happen that the LLC could be dissolved due to a failure of maintaining a registered agent, or missed paperwork. A judicial dissolution is issued by the court. LLC members may petition the court for a dissolution on various grounds, including member misconduct. 

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