June 14, 2013 Leave a comment
Another Business “Safe Harbor”
The last several blogs have focused on how a business owner protects personal assets from business liability impact. The conversation continues. As always, a business owner should seek the advice of an attorney in the state in which the business is located to assure the most appropriate legal business form is selected.
Most business owners select the sole proprietor form of business because it eliminates a layer of taxation on revenue generated by the business. This business form is simple to understand, flexible and usually gives the business owner(s) full control of all business decisions. However, there is no protection from direct business liability for personal assets. This holds true for partnerships as well.
The May Blog reviewed the benefits of a Limited Liability Corporation (LLC) which provides protection for personal assets and maintains pass through taxation for the business owner(s). This business form allows the business owner(s) to retain full control of business decisions and equity based on per cent of ownership. The owners of a LLC are called members and own a stated percent/portion of the business. As a business form it is gaining wide spread use in the business community given its flexibility to work like a sole proprietor or partnership.
Another legal business form that allows the business owner to enjoy some of the benefits of sole proprietorship and liability shelter is the Sub Chapter S Corporation. This business form provides pass through taxation to the business owner and removes business liability for personal assets.
A S Corporation can have up to 100 shareholders and still benefit from pass through taxation on dividends and income. These shareholders are called the owners of the company. To enjoy these benefits the following IRS requirements must be met:
- It is a domestic corporation chartered in the state of organization
- There are no more than 100 eligible shareholders, all must be US citizens
- Only eligible shareholders participate in the distribution, no corporate shareholders
- There is only one class of stock
The law requires regular shareholder meetings, a Board of Directors and defined upper level management with a CEO and CFO.
The S Corporation is a separate legal identity from its owners. The LLC is less concrete than a corporation and exists only as long as its members participate. If a LLC member dies or files for bankruptcy the LLC dissolves. This is not true for an S Corp.
This review is concerned with the general features of the S Corporation as compared with being a sole proprietor. There are other Sub S features related to type of income earned and retained earnings limits that must be addressed by an Accountant or Attorney.
Compliance with IRS guidelines for any form of business is a requirement of doing business.
June, 2013 Colleen Moynihan