FREQUENTLY
ASKED QUESTIONS:
Why
the State of Nevada?
What
are the Advantages and Disadvantages of a C-Corporation?
What
are the Advantages and Disadvantages of a S-Corporation?
How
does an LLC compare to a Corporation?
How
do I compare all corporate entities?
How
does a Nevada Corporation compare with Delaware?
What
does a Nevada Corporation cost?
Perhaps
the Secretary of State in Nevada, Dean Heller says it best.
Don’t just take our word for it
– here’s a page from the Nevada Secretary of State’s
web site, emphasizing the key benefits of incorporating here.
Dean
Heller
Nevada Secretary of State
Corporate
Information
|
|
| Why
Incorporate in Nevada? |
* No Corporate
Income Tax
* No Taxes on Corporate Shares
* No Franchise Tax
* No Personal Income Tax
* No I.R.S. Information Sharing Agreement
* Nominal Annual Fees
* Minimal Reporting and Disclosure Requirements
* Stockholders are not Public Record
|
| Additional
Advantages |
* Stockholders,
directors and officers need not live or hold meetings
in Nevada, or even be U.S. Citizens.
* Directors need not be Stockholders
* Officers and directors of a Nevada corporation can
be protected from personal liability for lawful acts
of the corporation.
* Nevada corporations may purchase, hold, sell or
transfer shares of its own stock.
* Nevada corporations may issue stock for capital,
services, personal property, or real estate, including
leases and options. The directors may determine the
value of any of these transactions, and their decision
is final.
|
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C
Corporations
Advantages
of the C Corporation
Creation of the corporate shield that, in the absence of personal
guarantees, limits the liability of stockholders to their
capital investment in the corporation and the usefulness for
estate planning purposes of the corporate form of business
organization are frequently cited advantages of forming a
C corporation.
Other
advantages include the following:
• Perpetual life of the corporation makes possible its
continuation, and the relatively undisturbed continued operation
of your business, despite the incapacity or death of one or
more stockholders.
• Tax deductions available to owners of a C corporation
that are not available to shareholders of more than 10% of
an S corporation are insurance cost tax deductions. Medical
insurance and other medical costs can be 100% deductible to
C corporations. This includes medical insurance payments,
deductibles, prescription items and non-prescription items
such as aspirin and bandages. Life insurance up to a set limit
per person is also tax deductible to the corporation.
• Housing costs and other benefits for employees (including
stockholder-employees) can be a tax-deductible expense for
the corporation.
• Fractional ownership interests are easily accommodated
in the initial offering of stock.
• The purchase, sale, and gifting of stock make possible
changes in ownership without disturbing the corporation's
ability to conduct business.
• The required separation of finances and records for
the corporation reduces the risk of unrecognized equity liquidations.
• To the extent the corporate shield is maintained and
other investments and savings of the stockholders are not
at risk, the personal life of stockholders is simplified.
• The annual meetings of stockholders and consultations
with legal counsel can provide stimulus for improved communication
with the stockholder group (usually a family group) and can
provide more comprehensive guidance for management.
Disadvantages
or Limitations of the C Corporation
It is financially advantageous to the owners of most C corporations
to pay surpluses to employees in the form of salaries or bonuses
rather than as dividends. Corporate net income distributed
to stockholders in the form of dividends is taxed once at
the corporate level and again at the recipient's level. Meaning
the C corporation pays income tax on its net income prior
to any distribution of dividends to stockholders, and the
dividends are taxable to the stockholders, resulting in double
taxation of corporation income distributed to the stockholders.
The effects of this limitation can be reduced when the stockholders
are corporation employees and derive most of their income
from salaries and wages paid by the corporation and no dividends
are paid.
Other
Limitations of the C Corporation
• Conflicts or disagreements among the usually small
group of stockholders in a small sized corporation may immobilize
decision making.
• Restrictions on the sale of stock and/or buy-back
agreements included in the bylaws may prevent minority stockholders
from being able to recover the value of their investment in
the corporation.
• Through the processes of gifting and inheritance,
stock ownership can become divided among many persons who
are not participants in operations of the business, which
can result in their becoming a voting block that does not
support needs and decisions believed desirable by managing
stockholders.
• Over time, corporation paid benefits for stockholder-employees
may become costly and exceed the ability of the business to
pay.
• If appreciated assets are owned by the corporation
and the corporation is dissolved, income taxes on the appreciation
amount will be generated.
• When corporate formalities are not followed –
that is, when director and shareholder meetings are not held
and minutes of such meetings are not kept. The corporate
shield of limited liability may be lost.
• When corporate assets are treated as personal assets
– for example, when a corporate vehicle is used for
family vacation and the corporation is not reimbursed for
the non-business use. When limited liability is lost, shareholders
become personally liable for any corporate legal or financial
obligations. In addition, if corporate income tax returns
are audited, failure to observe corporate formalities or treating
corporate assets as personal assets can result in loss of
corporate income tax deductions and levying of penalties and
interest on taxes assessed for previous years.
Tax
Implications – General
All real and personal property held by a C corporation is
taxable to the extent set by the tax code. C corporations
pay income tax at rates that, depending on their level of
taxable income, are usually less that the income tax rates
of single or married stockholders with comparable levels of
taxable income.
Wages paid to corporation employees are subject to payroll
taxes in the same manner as is the case for employees in any
other type of economic activity. Assets of the corporation
generally are retrieved to individual ownership only through
transactions that generate taxable income. Sale of stock establishes
the market price as the purchaser's tax basis for the stock,
but does not increase the tax basis of assets of the corporation.
Death of a shareholder may result in a "step-up"
of the tax basis to the then-current value of his or her corporation
stock, but does not increase the tax basis of assets held
by the corporation.
If the corporation is dissolved when it owns assets that have
appreciated in value (usually land, buildings, and/or equipment),
federal income tax will be due on the asset appreciation amount
even when the assets are not sold. For this reason, many management
advisers and estate planners recommend holding title to fixed
assets in an entity separate from the corporation –
for example, in individual ownership or in ownership by a
limited liability company. When this is done, the corporation
rents the fixed assets from the individual or non-corporate
entity. Generally, this approach is useful only when the value
of fixed assets is relatively large or there is good reason
to believe they will experience significant appreciation in
value, such as real estate.
“HOW
DO I KNOW A C-CORPORATION IS FOR ME?”
• Your company makes less than 50k profit each year.
• Your company is bigger with more than 10 possible
shareholders.
• You are trying to tax shelter (long term holding)
income.
• You are not doing a real estate investment company.
• You will not likely take losses in your company.
• You want liability protection personally.
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S
Corporations
An S
corporation is a regular corporation that has elected "S
corporation" tax status. An S corporation lets you enjoy
the limited liability of a corporate shareholder but pay income
taxes on the same basis as a sole proprietor or a partner.
In a regular corporation (also known as a C corporation),
the company itself is taxed on business profits. The owners
pay individual income tax only on money they draw from the
corporation as salary, bonuses or dividends. By contrast,
in an S corporation, all business profits "pass through"
to the owners, who report them on their personal tax returns
(as in sole proprietorships, partnerships and LLC's). The
S corporation itself does NOT pay any income tax, although
a co-owned S corporation must file an informational tax return
like a partnership or LLC -- to advise the IRS what each shareholder's
portion of the corporate income is.
Most states follow the federal pattern when taxing S corporations:
They don't impose a corporate tax, choosing instead to tax
the business's profits on the shareholders' personal tax returns.
About half a dozen states, however, do tax an S corporation
like a regular corporation. The tax division of your state
treasury department can tell you how S corporations are taxed
in your state.
"SHOULD
YOU ELECT S-CORPORATION STATUS?"
If your corporation meets certain criteria, such as having
only shareholders who are U.S. citizens or legal U.S. residents,
you can elect to do business as an S corporation. Operating
as an S corporation rather than a regular corporation may
be wise for several reasons:
• An S corporation generally allows you to pass business
losses through to your personal income tax return, using it
to offset any income that you (and your spouse, if you're
married) have from other sources.
• When you sell your S corporation, your taxable gain
on the sale of the business can be less than if you operated
the business as a regular corporation. But aside from the
benefits, S corporations impose strict requirements. The main
rules are:
• Each S corporation shareholder must be a U.S. citizen
or legal U.S. resident.
• S corporation profits and losses may be allocated
only in proportion to each shareholder's interest in the business.
• An S corporation shareholder may not deduct corporate
losses that exceed her "basis" in her stock -- which
equals the amount of her investment in the company plus or
minus a few adjustments.
• S corporations may not deduct the cost of fringe benefits
provided to employee-shareholders who own more than 2% of
the corporation. Fortunately, your decision to elect to be
an S corporation isn't permanent. If you later find there
are tax advantages to being a regular corporation, you can
drop your S corporation status after a certain amount of time.
"HOW TO ELECT S-CORPORATION STATUS."
To be treated as an S corporation, all shareholders must simply
sign and file IRS Form 2553. Shareholders then pay income
tax on their share of the corporation's income whether or
not they actually receive the money. If the corporation suffers
a loss, shareholders can claim their share of that loss.
Advantages
of S-Corporation Status
One of the main advantages of S-Corporation status is that
it avoids the double taxation which occurs with a regular
C-Corporation. In a C-corporation, the corporation pays income
tax on its profits and, if those profits are distributed to
shareholders, the shareholders pay income tax on the distribution.
Electing S-Corporation status passes the income or losses
of the corporation to the shareholders who recognize the income
or loss on their personal tax returns. This is an advantage
if the corporation expects to show a loss at first. The loss
can be used to offset the shareholder's income from other
sources, including a spouse's income.
Disadvantages
of S-Corporation Status
Passing income through to shareholders can be a disadvantage
in some instances. If the business is profitable, shareholders
will be required to pay income tax on their share of the profits,
even if that money is not distributed to them. In a C-Corporation,
profits can be used to expand the business and shareholders
are not required to pay taxes until distributions are made.
Reasonable salaries paid to employees are deductible business
expenses for S-Corporations as well as for C-corporations.
However, in an S-Corporation, fringe benefits may not be deductible
as they would be in a C-Corporation.
Even though losses pass through to shareholders in an S-Corporation,
those losses aren't deductible by shareholders who don't materially
participate in the business. This could result in higher taxes
overall.
S-Corporation
Requirements
Not every corporation qualifies for S-Corporation status.
In order to elect S-Corporation status, the corporation can
only have one class of stock. The corporation can have no
more than 100 shareholders, although a husband and wife who
both own shares will only be counted as one shareholder. No
shareholder can be a nonresident alien or another corporation.
All of the shareholders must consent to elect S-Corporation
status. The corporation also cannot earn too much of income
from investments, (passive income), otherwise tax disadvantages
may result.
“How do I know an S election is right for me?"
• You have fewer than 100 shareholders.
• You are not doing a real estate investment business
(holding longer term).
• Your company brings in more than 30k a year.
• You have a sales or service type of business.
• All shareholders are citizens or legal residents of
the U.S.
• You wish to protect from personal liability for the
company.
• You have sole ownership of the company.
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LLC's
Compared to Corporations
To avoid double taxation, corporations can make a special
tax election, known as a "subchapter S election",
to be taxed as a flow-through entity like a partnership and
LLC. Corporations which make the subchapter S election are
known as "S-corporations", and corporations which
do not are known as "C-corporations." However, there
are still important differences between C Corporations, S
Corporations and LLC's.
Advantages:
Fewer corporate formalities. Corporations must hold regular
meetings of the board of directors and shareholders keep written
corporate minutes and file annual reports with the state.
On the other hand, the members and managers of an LLC need
not hold regular meetings, which reduce complications and
paperwork.
No ownership restrictions. S-corporations cannot have more
than 100 stockholders, and each stockholder must be a natural
person who is a legal resident or citizen of the United States.
There are no such restrictions placed on an LLC.
Ability to use the cash method of accounting. Unlike a C-corporation,
which often must use the accrual method of accounting, most
limited liability companies can use the cash method of accounting.
This means that income is not earned until it is received.
Ability to place membership interests in a living trust. Members
of an LLC are free to place their membership interests in
a living trust. It is difficult to place shares of an S-corporation
into a living trust.
Ability to deduct losses. Members who are active participants
in the business of an LLC are able to deduct its operating
losses against the member's regular income to the extent permitted
by law. Shareholders of an S-corporation are also able to
deduct operating losses, but shareholders of a C-corporation
are not.
Unemployment tax. A member-employee of an LLC is not required
to pay unemployment insurance taxes on his or her salary.
Shareholder-employees of corporations must pay this tax. Currently,
the federal unemployment tax is 6.2% of the first $7,000 of
wages paid, to a maximum of $434 per employee.
Flexibility
internally as to distributions to members. Not strictly
pro-rate to ownership, as it the case with corporation ownership.
Disadvantages:
Profits subject to social security and medicare taxes. In
some circumstances, owner-employees of an LLC may end up paying
more taxes than owner-employees of a corporation. Salaries
and profits of an LLC are subject to self-employment taxes,
currently equal to a combined 15.3%. With a corporation, only
salaries (and not profits) are subject to such taxes. This
disadvantage is most significant for member-employees who
take a salary of less than $72,600.
For example, if a member earns $40,000 in salary and is distributed
$20,000 of the LLC's profits, a 15.3% tax would have to be
paid on $60,000. For an S-corporation, social security and
Medicare taxes would only have to be paid on the $40,000 salary.
Please note, however, that the IRS frowns upon employee-owners
of an S- corporation not paying themselves a reasonable salary
and simply distributing the profits. In situations where the
IRS feels that shareholders are taking too little in salary,
the IRS will re-characterize all or part of the profits as
salary.
However, LLC's may also elect to be treated and taxed as an
S-Corporation if needed. This would help eliminate the social
security and Medicare taxes. This type of election should
be made if the income generated by the LLC will be considered
earned income, not passive. (Passive income is limited to
25% of income produced by a company when being taxed as an
S-Corporation.)
Owners must immediately recognize profits. A C-corporation
does not have to immediately distribute its profits to its
shareholders as a dividend. This means that shareholders in
a C-corporation are not always taxed on the corporation's
profits. Because an LLC is not subject to double-taxation,
the profits of the LLC are automatically included in a member's
income.
Fewer fringe benefits. Member-employees of an LLC who receive
fringe benefits, such as group insurance, medical reimbursement
plans, medical insurance and parking, must treat these benefits
as taxable income. The same is true for stockholder-employees
who own more than 2% of an S-corporation. However, stockholder-employees
of a C-corporation who receive fringe benefits do not have
to report these benefits as taxable income.
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CORPORATION
COMPARISON CHART
Advantage
Corporation Services - Customer Service: 1.866.289.6920
| CATEGORY |
Sole
Proprietorship |
Limited
Liability Corporation |
C-Corporation |
S-Corporation |
| Organizational
Terms |
Litttle
or no documentation required. |
Articles
of Organization need to be filed with the State with
State filling fees. |
Articles
of Incorporation need to filed with the State with
State filling fees. |
Articles
of Incorporation need to filed with the State with
State filling fees. |
| Operational
Terms |
Little
or no legal requirements |
Operating
agreement, managers, members, certificates. |
By
Laws, Board of Directors/Officers,Stock Holders, Stock
Certificates. |
By
Laws, Board of Directors/Officers,Stock Holders, Stock
Certificates. |
| Taxation |
Sole
Proprietor pays all the taxes. |
Taxes
are passed thru to the members of the LLC |
Taxes
paid at an entity level (starting at 15%) |
Not
taxed at entity level gains and losses are passed
thru to shareholders. |
| Management
of Business |
Proprietor
has 100% power to act for business. |
Members
determine a operating agreement that will outline
management. |
Shareholders
elect board of directors, board elects officers. Officers
act on behalf of the Corporation. |
Shareholders
elect board of directors, board elects officers. Officers
act on behalf of the Corporation. |
| Liabilities |
100% |
Members
are not typically held liable for debts from the company. |
Shareholders
are not typically held liable for debts from the company. |
Shareholders
are not typically held liable for debts from the company. |
Types
& Number of Owners |
Total
Ownership |
Not
Limited. Generally there needs to be 2+ |
Not
Limited. No Limits |
Individuals.
Estates and some Trusts. No more than 75% |
| Transferability
of Interest |
None |
Upon
Approval of current Members |
Shares
transfer easily. |
Share
can be transferred upon consent. |
