Corporate / LLC / Partnership
Generally, there are six different business forms that one or more persons can use to conduct business:
- Sole proprietorship
- General partnership
- Limited liability company (LLC)
- Limited partnership
- C corporation
- S corporation
Sole proprietors are generally liable for all of the debts of their business, including the actions of their employees (for example, if an employee is negligent in an automobile accident in the course of business).
A general partnership is an organization which two or more individuals can establish. This suffers from the same problems as a sole proprietorship, in that each of the partners is liable for whatever occurs in the business and for the actions of the employees in the business. In addition, they are liable for the actions of their partners in the business.
LLCs became popular as an alternative to partnerships and sole proprietorships beginning in the late 1980s. A single individual or two or more individuals can form an LLC, in which case they would not be liable for the actions of the business or the actions of the employees of the business, unless they cause the damage or assume liability (such as signing a bank guaranty).
Limited partnerships are a form of partnership under state law, providing protection to the partners in the same way that an LLC provides protection. However, a limited partnership must have a general partner, and that general partner could incur liability. Most limited partnerships (along with general partnerships) have been replaced by LLCs or converted into them.
The LLC also has a tax advantage in that, although the LLC is a separate legal entity, the sole owner can be taxed directly on its income to the same extent as if he was conducting business as a sole proprietor. Similarly, the IRS allows LLCs consisting of two or more individuals to be taxed as partnerships, although the members of the LLC are not liable to the same extent that partners are liable.
Corporations have been in existence for hundreds of years. Before the advent of LLCs, a corporation was the best way for business people to operate with reduced liability exposure.
Tax laws provide that a corporation may be established as a so-called “C” corporation. The first $50,000 of the taxable income of that corporation is taxed at 15%, the next $25,000 is taxed at 25%, and the next $25,000 is taxed at 34%.
The Internal Revenue Code provides that rather than having a corporate-level tax, a corporation may make an “S” Corporation election so that there is no tax at the corporate level, but the owners of the business will pay tax on the corporate-level income at their tax rates, in accordance with their percentage ownership of the corporation.
Our firm brings expertise and experience to help you structure your business, taking into account these and other considerations. Certain organizational documents need to be prepared and filed with the state of Michigan in order to have a validly-formed entity. We provide advice concerning how the business should be operated, obtain the taxpayer identification number, and file the necessary tax elections within the required time periods.
Are you considering selling your business or acquiring a new business? We can assist in these areas in the most tax-advantageous, liability-free manner.