Answer to Question #172160 in Mechanical Engineering for Kaif Ali

Question

Business Firms & Business Entities. Sply LLC 8n details

Answer 1

A corporation is an independent business entity, separate from the people who own, control, and manage it.

Corporations can enter into contracts, incur debts, and pay taxes apart from their owners. In other words, the Corporation itself, not the shareholders who own it, is held legally liable for the actions and debts the business incurs.

Types of Corporations

There are 2 main types of corporations in the United States: an S corporation (also called an “S corp”) and a C corporation (or C Corp).

Each type of corporation is formed in different ways, with its own combination of advantages and drawbacks.

What is an S Corp?

An S corp is a type of corporation created with the IRS that passes corporate income, losses, deductions, and credits through its shareholders. These shareholders then report the flow-through of income and losses on their personal tax returns and are taxed at individual rates, rather than the business itself being taxed.

This allows the S corp to avoid “double taxation.” In “double taxation,” business profits are taxed before being distributed to owners and are then taxed a second time when the owners report these profits on their individual tax returns.

What is a C Corp?

The C corporation is the most common type of corporation in the United States. As a C corp, there is no limit to how much your company can grow!

A C corp can sell stocks and can have an unlimited number of shareholders. Like a corporation, this type of business is independent of the people who own and manage it and is considered a legal “person” under tax laws.

Pros

Before creating a corporation, consider what you hope to gain from establishing this separate entity. The biggest advantages of having a corporation are:

· As with some other types of businesses, corporations provide liability protection for their owners, called shareholders.

· Companies hoping to raise money from investors will have an easier time as a corporation, which can sell ownership shares.

· Corporate profits are taxed, but at a lower rate than the personal income tax rate individuals pay.

Cons

While corporations can certainly shield owners from liability, the downsides are sizeable and very costly:

· C Corporations are complex and expensive to set up.

· Once established, corporations spend significant sums of money to stay on top of changing business regulations and timely filing of paperwork. They are best for large organizations with many employees.

· Corporations pay federal, state, and sometimes local taxes on profits, unlike LLCs.

A limited liability company (LLC) is a business structure in the United States whereby the owners are not personally liable for the company's debts or liabilities. Limited liability companies are hybrid entities that combine a corporation's characteristics with those of a partnership or sole proprietorshipUnlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each LLC member. LLC members report profits and losses on their personal federal tax returns, just like the partnership owners would.

The owners of an LLC have no personal liability for the obligations of the LLC. An LLC is the entity of choice for businesses seeking to flow through losses to its investors because an LLC offers complete liability protection to all its members.

The basic requirement for setting up an LLC are:

1. Search your business name - before you form an LLC, you should check that your proposed business name is not too similar to another LLC registered with your state's Secretary of State

2. File Articles of Organization - the first formal paper you will need to file with your state's Secretary of State to form an LLC. This is a necessary document for setting up an LLC in many states.

3. Create an Operating Agreement - an agreement among LLC members governing the LLC's business and member's financial and managerial rights and duties. Think of this as a contract that governs the rules for the people who own the LLC.

4. Get an Employer Identification Number (EIN) - a number assigned by the IRS and used to identify taxpayers required to file various business tax returns. You can easily file for an EIN online if you have a social security number. If you do not have a social security number or live outside the United States, ask a business lawyer to help you get one.

5. File Statement of Information - includes fairly basic information about the LLC that you need to file with your state’s Secretary of State every 2 years. Think of it as a company census you must complete every 2 years.

6. Search and Apply for Business Licenses and Permits. Once your business is registered, you should look and apply for the necessary licenses and permits you will need from the county and city where you will do business. Every business has its own business licenses and permits, so either does a Google search of your business along with the words "permits and licenses" or talk to a business lawyer to guide you with this.

Differences:-

Understanding the difference between a corporation and limited liability partnership is crucial for business owners deciding upon registering their firm Differences are:-

1) How the Business is Formed

Business organizations (not including sole proprietors) must register as a specific business type with the state where they do business. All states recognize businesses formed as corporations, limited liability companies (LLCs) or partnerships, or variations of these forms.

Forming an LLC. An LLC is formed by one or more business people, as owners. The owners, called "members," file Articles of Organization with a state. Then they put together a contract called an Operating Agreement to manage the day-to-day activities and decide on each member's percentage share of ownership.

Forming a Corporation. A corporation is formed (incorporated) by filing corporate organization documents in the state where the corporation is located. The corporation also creates a Board of Directors to oversee the corporate business, and the board agrees on bylaws (operating documents).

2) Business Ownership

LLC's and corporations both have owners, but the form of ownership is different.

LLC members have an equity (ownership) interest in the assets of the business because they have made an investment to join the business.

Corporate owners are shareholders or stockholders who have shares of stock in the business.

How you are paid - and taxed - as an LLC owner or a corporation could be a major factor in determining which form of business you choose.

3) Profits and Losses

The profits and losses of an LLC and a corporation are handled differently. LLC profits and losses are passed through to individual owners, while the corporation holds corporate profits and losses

LLCs as Pass-through Businesses. Limited liability companies, like partnerships and sole proprietorships, are pass-through entities. Pass-through businesses are those in which the business's profits and losses pass through to the owners or shareholders. The owners pay their share of the company's profits on their personal tax return (Form 1040 or 1040-SR).

Corporations as Separate Business Entities. Corporations are separate from the owners. The corporation pays income taxes on its profits or losses, not by the owners directly. Some of the corporation's earnings may be paid to the owners in dividends, but this isn't direct. SThe corporation may keep some earnings.

4)- LLC and Corporate Income Taxes

Corporations and LLCs pay income taxes differently. Both entities pay tax on their profits for the year, called net income for an LLC and net earnings for a corporation.

Corporate Income Taxes

Corporations are taxed at the corporate tax rate, currently 21%.³

Shareholders of corporations pay tax on dividends when they receive them.

Corporations are sometimes said to have double taxation because the corporation is taxed on its net earnings and the shareholders are taxed on the dividends from those net earnings.

LLC Income Taxes

Owners of an LLC are taxed like partners in a partnership; that is, they receive a distributive share of the profits each year and pay taxes on that share on their personal tax returns (that pass-through concept discussed above).

5)Self-Employment Taxes

LLC owners are considered to be self-employed and they must pay self-employment taxes (Social Security and Medicare tax) on their share of the LLC's profit each year.

Corporate shareholders aren't self-employed so they don't have to pay this tax. Corporate owners who also work as employees have Social Security and Medicare tax taken from their paychecks.

Rules and regulations governing how to form a business entity vary by state. Federal taxes and applicable laws also impact these businesses. To ensure you have the most accurate and up-to-date information, it is highly recommended that you consult with a professional tax advisor.

Here are some basic steps to starting a business:

1. Select a Name

Deciding on a name for your business can be difficult. FoTheusiness name can be the owner’s name; sole proprietorships or a fictitious name can be used. It is important to first search your state and county to ensure another business is not already using that name. This can be done by conducting a free online search for that name. Each state provides a business name directory, along with specific guidelines for starting a business.

A company can also choose to operate under another name by filing a Doing Business As (DBA). Since companies are formed at the state level, you may also want to check national records or even take action to protect your business name by filing for a federal trademark. The U.S. Patent and Trademark Office can trademark your mark wh, giving brand protection across states (and beyond). Disputes may arise le, leading to legal action, in which case be, proving were using a business or trademark first would be highly advantageous.

2. Pick a Legal Structure

Determining the right legal structure can be difficult. There are many factors to consider, and each state offers different benefits and consequences for the various business structures you can form. Some states charge annual fees and even extra taxes for certain businesses. Generally, you want to consider your business needs, investor requirements, and the level of liability protection desired. You then choose to set up the entity as a sole proprietorship, partnership, LLC, corporation, or S corporation.

3. Select a Location

A key consideration in starting a business is determining if you need a physical location and where it should be established. You should take some time to consider this step, as it could greatly impact your sales. Depending on the location you choose, you may also be required to obtain additional permits or zoning clearance, or even a city business license.

Each state has specific laws and regulations for various businesses, so you will need to check for your state-specific guidelines. You may have to file articles of incorporation and prepare bylaws for your business. This is a good time to prepare a business plan that outlines your company and sets forth policy and long-term plans.

4. File Necessary Paperwork

Once you have decided on your business entity type, you can file with your state and register your business. You may also be required to obtain business licenses and permits, as well as zoning clearance and other approval requirements. You may need to contact your local state tax commission as well. Some states require certain business entities to create and submit articles of incorporation, operating agreements, and partnership agreements. Some form submissions require additional steps, such as obtaining an Employer Identification Number (EIN) from the Internal Revenue Service.

5. Set Up Financing and Taxes

There are many financial considerations that a business owner must consider. It’s vital to keep business assets and accounting separate from the owner’s personal accounting to prove that a separate entity exists. This requires setting up a company bank account.

Be aware that some revenue forms, such as income from businesses, rent, and dividends, do not have taxes withheld as a paycheck does. For this reason, business owners may have to pay self-employment taxes themselves.

6. Hire Employees

Hiring employees involves obtaining the requirements. The IRS provides an Employer Identification Number for free, which is used to identify your business. This entity number is used on a variety of entity formation forms. A sole proprietorship does not need to obtain an EIN since it can use the owner’s Social Security number or tax identification number instead. Employees must have their payroll taxes withheld and sent to the government regularly.

In general, forming a business entity serves four purposes: (1) protecting business owners; (2) saving taxes; (3) providing certainty and structure to business operations; (4) presenting a professional image to customers and the general public.

                                                                                               

(1) Protecting business owners:

Certain types of business entities, including corporations and limited liability companies, are distinct from their owners if properly established and operated. Therefore, when made with a legitimate purpose, actions taken on behalf of such a business do not expose its owners to liability. However, a business entity does not shield from liability that arises from the business entity's abuse, personal guarantees, or other actions taken in a personal capacity or for personal benefit.

(2) Saving Taxes

Depending on the size, profitability, and expenses of the business at issue, an owner can save on taxes by choosing an appropriate business entity. It is strongly suggested to seek the advice of a tax professional before setting up a business.

(3) Structured Business Operations

Certain business entities require the enactment of provisions providing for the internal governance of the business entity. These provisions (bylaws for corporations, partnership agreements for partnerships, and operating agreements for limited liability companies) provide structure to the business entity and prevent disputes between owners.

(4) Professional Image

A properly formed and operated business entity projects a professional image, thereby encouraging consumer confidence in the business and its products and services.