Kansas City Start-Up Question I Hear Often
The Question I hear most from Start-Ups in Kansas City
“Should I form an LLC or a corporation?” No matter if I am at 1 Million Cups, hanging out at We-Work, iWerx or Westport Commons, when I am talking about business law in Kansas City with Start-Ups, that’s the most common question I hear in regard to establishing a business.
The decision to set up a business as an LLC or a corporation — or any other entity — is an important one that should be made after speaking to your tax and legal counsel.
A brief overview of the pros and cons of an LLC when compared to a corporation is below. First, it is important to note that operating your business as a registered entity is an excellent choice and provides for personal liability protection. Each entity choice will have its own advantages. Choosing the right business entity will depend on your needs both current and future.
Here are some of the advantages of an LLC compared to a corporation:
LLCs do not need to hold regular meetings the members and managers can meet when necessary. On the other hand, corporations must hold regular board and shareholder meetings, keep written minutes and file annual reports with the Secretary of State.
Fewer ownership restrictions
For example, S corporations cannot have more than 100 shareholders, and each shareholder must be a U.S. resident or citizen. LLCs have no such restrictions.
Ability to use the cash method of accounting
Most LLCs can use the cash method of accounting. This means income is not earned until it is received. C corporations must often use the accrual method of accounting.
An LLC is treated as a "pass-through" entity for tax purposes. This means that LLCs avoid double taxation. Additionally, an LLC owner is not required to pay unemployment insurance taxes on his or her own salary.
Ability to deduct losses
Members who are active participants in the LLC's business can deduct its operating losses against the member's regular income to the extent permitted by law.
Here are some of the disadvantages of an LLC when compared to a corporation:
Owners must immediately recognize profits
Profits are automatically included in a member's income unless an LLCs elects to be taxed as a corporation. C corporations have the ability to decide when to distribute profits to shareholders as a dividend.
Profits are subject to Social Security and Medicare taxes
With a corporation, profits are not subject to self-employment taxes — only salaries are. Sometimes, an LLC owner may end up paying more taxes than owners of a corporation. Salaries and profits of an LLC are subject to self-employment taxes.
Fewer fringe benefits
C corporation employees who receive fringe benefits do not have to report these benefits as taxable income. Employees of an LLC who receive fringe benefits must treat these benefits as taxable income. The same is true for employees who own more than two percent of an S corporation.
Unfavorable state tax rules and fees
In some states — including California and New York — an LLC may pay higher taxes and fees than would a corporation that generated the same revenues.
If you need a business lawyer in Kansas City, call Jeff today.