FAQs

WHAT DO I NEED TO KNOW IN ORDER TO SET UP A NEW US COMPANY?

• Who will own the company? These will be the shareholders of a corporation or members of an LLC.
• Who will manage the company? These will be the directors and officers of a corporation or managers of an LLC.
• What type of entity will it be? Generally, it will be a corporation or an LLC.
• What is the name for the company? 
• What is the address for the company?
• Who will act as the registered agent? Almost every state requires its companies to maintain a legal address and agent within its borders to accept legal process and to which the state government can send annual reports, annual tax forms or other compliance matters.
• What is the agent’s address?

WHY DO BUSINESSES INCORPORATE?

Businesses incorporate primarily for protection: protection of the owners of the company from the liabilities of the business. Both corporations and limited liability companies legally separate the owners/investors of a company from their company’s liabilities. Further, incorporation of either a corporation or an LLC may provide tax benefits, prestige and/or name protection, as well as possibly making it easier to set up health insurance, retirement plans and other benefits to owners and employees.

WHAT IS A CORPORATION?

A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation (called a charter or certificate of incorporation in some states) are filed with the proper state authority, and all fees are paid.

WHAT IS A C CORPORATION?

In the US tax code, a corporation is a C corporation by default. Because it is separate from its shareholders, it pays its own taxes based on its own income. No one is entitled to take money from the corporation unless it is a payment for services rendered, for salary or bonus, or as a dividend. Income remaining after deductions for expenses and depreciation are taxed by the federal government and perhaps also by state governments. What’s left after this is available to build up capital in the corporation or to give to the shareholders as dividends.

WHAT IS AN S CORPORATION?

If a corporation has 100 or fewer shareholders, all of whom are US residents for tax purposes and either human beings or qualified trusts, it can elect to be treated as an “S” corporation and avoid corporate taxation. For many shareholders, this status lets them avoid double taxation.

WHAT IS A LIMITED LIABILITY COMPANY (LLC)?

An LLC is an entity that combines features of partnerships and corporations. It combines the advantages of limited liability (like a corporation) with the pass-through taxation and structural flexibility of partnerships.

WHAT IS A NON-PROFIT CORPORATION?

A nonprofit corporation is a corporation that is formed pursuant to a different law than a standard for-profit corporation. The corporation must be formed for a religious, charitable, educational, literary, scientific or other non-business purpose. While a standard business corporation is designed to benefit and generate a profit for its shareholders, nonprofits do not have the profit motive. Nonprofit corporations are allowed to apply for tax-exempt status at both the federal and state level.

WHICH TYPE OF BUSINESS ENTITY IS BETTER?

Each entity has its advantages and disadvantages, so which entity to choose depends on what the company intends to do.

WHAT ARE THE MAIN DIFFERENCES BETWEEN A C CORPORATION AND AN S CORPORATION FROM A TAX PERSPECTIVE?

• C corporations. C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal income. Tax on corporate income is paid first at the corporate level and again at the individual level on dividends.
• S corporations. S corps are pass-through tax entities. They file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.

WHAT ARE THE MAIN DIFFERENCES BETWEEN A S CORPORATION AND LLC FROM A TAX PERSPECTIVE?

• Paying Income Taxes
  • The multi-member LLC and the S corporation (even if it has only one shareholder) report their income and tax attributes on information returns (Form 1065 in the case of the multi-member LLC; Form 1120S in the case of the S corporation) and provide each owner with a Schedule K showing that owner’s allocation of the entity’s tax attributes.

• Self-Employment Taxes
  • The owners of LLCs (single- and multi-member) are also treated differently from S corporation shareholders in the way they pay employment taxes. The LLC owner is self employed; accordingly the owner is subject to self employment tax (“SECA”). In 2010, the SECA tax rate is 15.3% on the first $106,800 and 2.9% on amounts in excess of $106,800, with 50% of the SECA tax deductible on the owner’s income tax return. The LLC owner’s entire share of the LLC’s income is deemed to be earnings from self employment subject to SECA.
  • The S corporation shareholder who works for the corporation, on the other hand is an employee whose reasonable compensation is subject to FICA (Social Security and Medicare taxes). Half of FICA tax is paid by the employee and half by the S corporation employer. The employer’s half is deductible. In 2010, the FICA tax rate on each of the employee and the employer is 7.65% on the first $106,800 and 1.45% on amounts in excess of $106,800. If the S corporation pays a shareholder-employee reasonable compensation, amounts distributed as corporate earnings will not be subject to FICA.