Incorporating

[Silden]

Luckily my small company consisting of myself and my artist have run into good enough times that we're thinking of incorporating the business. Mostly to take advantage of the liability protection and to make it a bit more official. My question however is what is the best or most popular corporation to form? Basically, I have it down to an S-Corp or an LLC. What is the best one for a small software developer? I'm more curious on what other people have chosen and why they chose that one. Any help you can give me is greatly appreciated. Thanks!

[ChrisD]

1. LLC...
Easier taxes etc...
Works just like a partnership with protection.

Simple.

2. You DON'T need a lawyer to do this...

3. Your local SCORE office or SMALL BUSINESS ADMINISTRATION can probably
walk you through most of it...

4. IF and LLC gets more then two partners it can be run much more like a Corp
and thus have minsutes and meetings and a lot more paper work etc.

[DCoder]

You should definitely check out much of the content presented at http://www.llcweb.com/.

Any sort of incorporated structure will provide protection from creditors, but an LLC provides a simpler partner-like structure that you can't really get at with an SCorp. The other major benefit (from what I can tell) is the less stringent requirements around corporate "action" such as board meetings, resolutions, stock voting, etc.

Plus, I believe that the taxation structure on an LLC is a little bit more forgiving (less strict?) than an S-Corp.

Of course, IANAL, so I highly recommend you and your artist/partner split the cost of hiring / consulting with a small-business attorney or advisor. This advisor can definitely provide real advice on how to structure your organization.

-daniel

[ChrisD]

Originally posted by DCoder

Plus, I believe that the taxation structure on an LLC is a little bit more forgiving (less strict?) than an S-Corp.


Money flows to the partners at the end of the year.
Then they pay taxes as individuals.
Where as Corps all have DOUBLE taxation because the corp is like a person and pays its own taxes.

[jamie]

All of the points above are good reasons for an LLC. My partner and I are an LLC and it's worked out fine...

[KenD]

A corporation doesn't pay double taxes. A corporation pays taxes on the income but salaries to employees are tax deductible and the employees pay tax on their income. Money is not taxed twice.

KenD

[ChrisD]

Originally posted by KenD
A corporation doesn't pay double taxes. A corporation pays taxes on the income but salaries to employees are tax deductible and the employees pay tax on their income. Money is not taxed twice.

KenD

Are you sure?

Lets say a corp makes 100,000 in year and pays taxes on it.
Next year it uses that money to pay its employees.

The employees then pay tax on there income.

Thus the same money has been taxed twice.

[KenD]

I don't run a corporation but from what I have read about it, this is my understanding: If the corp makes 100,000 and pays 40,000 in wages, the 40,000 is a tax deductible business expense so the corp only pays taxes on the remaining 60,000 (or whatever is left after other deductions).

But I recommend anybody who is considering a corporation to read up on the subject.

KenD

[Jake]

My step dads internet company went incorperated and it was a big deal. From what I know I think a LLC is the best option for you.

[szymczyk]

C Corporations can be double taxed. In Ken's example, the $60,000 remaining would be taxed. Assuming the rate is 15%, $51,000 would remain. If I own this corporation and want to pocket the $51,000, it counts as personal income, and I would have to report it on my 1040 tax return so the money would be taxed twice. S Corporations get around this problem. All the profits of the company are split among the owners and the owners report the income on their personal tax returns.

Now why would anybody form a C Corporation if the profits can be taxed twice? C Corporations can write off more expenses than S Corporations and they can use losses from previous years to reduce the taxable income in a profitable year. C Corporations' profits can be used more flexibly than S Corporations. In the example from the previous paragraph, I could take $26,000 of the $51,000 out of the company, leaving the remaining $25,000 in the company. With an S Corporation, all the profits go to the owners.

If you have dreams of being a big company, I would go with the S Corporation. You get the benefits of a LLC, and when you get big enough to hire employees and give them fringe benefits, you can switch from an S Corp to a C Corp to take advantage of the write-offs only C Corps can take. The downside of incorporating is that you have to create bylaws for the corporation, elect officers and a board of directors, and have annual shareholders and board meetings. It's not as bad as it sounds. You can buy corporate kits that have stock certificates and templates for bylaws and annual meetings that make the process much easier.

[KenD]

Originally posted by szymczyk
C Corporations can be double taxed. In Ken's example, the $60,000 remaining would be taxed. Assuming the rate is 15%, $51,000 would remain. If I own this corporation and want to pocket the $51,000, it counts as personal income, and I would have to report it on my 1040 tax return so the money would be taxed twice.

I looked up some information about C Corporations and szymczyk is correct. But the owner can also be an employee and if the corp pays out all the income in wages, there's no income to pay tax on. Only dividends to shareholders are taxed twice. If there's no money to pay dividends there's nothing to double tax.

KenD

[wadesworld]

Originally posted by KenD
I looked up some information about C Corporations and szymczyk is correct. But the owner can also be an employee and if the corp pays out all the income in wages, there's no income to pay tax on. Only dividends to shareholders are taxed twice. If there's no money to pay dividends there's nothing to double tax.

KenD

The only problem is, shareholders don't take too kindly to all the money getting paid out in salaries. After all, if it is, what's the value to those that invested their money?

Shareholders want one of the following:

1) Extra money to be put into shareholder's equity
2) Extra money to be paid out to them in dividends
3) Extra money to be used for R&D, acquisition, expansion, etc - in other words, to grow the business.

In most of those cases, there are tax consequences.

BTW, you forgot the triple-tax - the money I earn may well be taxed again when I die.

Wade

[KenD]

Originally posted by wadesworld
The only problem is, shareholders don't take too kindly to all the money getting paid out in salaries. After all, if it is, what's the value to those that invested their money?


True but if you are the only share holder and only employee it doesn't matter too much. It all depends on each one's particular case what might be the best option.

And you pay taxes many times over. Buy material and you pay tax on it. Build a house and you pay tax on the house built with the material you paid tax on bought with money you paid tax on...

KenD