Business Organization and Starting a Business Information

Business Formation

Issue

C Corporation

S Corporation

LLC

Restrictions on number or owners.

Most states allow one person corporations; Some require two or more share holders

Same as C Corporation, but no more then 35 shareholders permitted

At least two members

Who makes management decisions?

Board of Directors

Same as C Corporation

Ordinarily members; or managers if manager-managed LLC

Who may legally obligate?

Directors of officers

Same as C Corporation

Ordinarily members; or managers if manager-managed LLC

Limits of transfer of ownership interests business?

Transfer of stock may be limited under securities law or restrictions in Articles Of Bylaws

Same as C corporation but transfers limited to persons and entities that qualify as S corporation shareholders

Consent of non-transferring members usually required

Source of start-up funds

Initial Shareholders (cannot invest with promise to perform services or contribute in the future)

Same as C corporation but cannot issue different classes of stock with different financial provisions

Members (may usually invest with promise to perform services or contribute cash in the future.)

Ease of conversion to another business form

May change to S corporation by filing simple tax election; change to LLC can involve tax cost and legal complexity

Generally same as C corporation - may terminate S tax status to become C corporation but cannot reelect S status for five years after

May change to general or limited partnership or corporation; legal paperwork involved

How business profits are taxed

Split up and taxed at corporate rates and individual tax rates of shareholders

Individual tax rate of shareholders

Individual tax rates of members as long as LLC meets IRS rules (has no more then two corporate characteristics)

Tax-deductible fringe benefits available to owners who work in business

Tax- deductible fringe benefits for employee shareholders; may fully deduct medical insurance premiums and reimburse employees' medical expenses

Same as general partnership, but employee-shareholders owing 2% or more of stock are restricted from corporate fringe benefits under partnership rules

Same as general partnership

Deductibility of business losses

Corporation may deduct business losses (shareholders may not deduct losses)

Shareholders may deduct share of corporate losses on individual tax returns, but must comply with special limitations

Generally members entitled to deduct losses (subject to active-passive investment loss rules that apply to all businesses)

Tax level when business is sold

Two levels; shareholders and corporation may be taxed on liquidation if it includes sales on transfer of appreciated property

Normally taxed at personal tax levels of individual shareholders, but corporate level tax sometimes due if S corporation was formerly a C corporation

Personal tax levels of individual members.

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