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FAQ

How can an LLC with multiple owners not be a partnership?
Let’s take a quick look at each a partnership and an LLC.PartnershipA legal partnership is formed through a partnership agreement between two or more principal parties. What sets a partnership apart from other legal entities is profit distribution, tax obligations and liability exposure. Initial capitalization is is achieved by capital contributions made by each partner pursuant to the terms of the partnership agreement. These partners share the burden of liability exposure on behalf of the partnership directly related to the percentage of their capital contribution as calculated against the the total. In other words, (put simply) your percentage of contribution and ownership determines your profit distribution and personally responsibility if the partnership is found liable for damages. There is no corporate veil protection for partnerships. Each partner may be sued individually or collectively for the actions of the partnership.LLCThough it bears similarities to both a “C” Corporation and a legal partnership, a limited liability company (“LLC”) is neither a corporation nor a partnership. Therefore, the owners of an LLC are not a shareholder or a partner. Rather, they are called members. Nevertheless, you can find in an LLC the combination of the best characteristics of a corporation and a partnership. An LLC’s member can be any person, partnership, other LLCs, corporations or other foreign entities.Just like a corporation, and unlike an LLC, a limited liability company offers its owners protection from any personal liability from the business debts. What makes it better is that it is a pass-through entity with regard to tax, something a corporation is not. Being a pass-through entity means it can pass through to its owners the company’s profits as well as losses. They will then reflect these on their personal tax returns just as it is done in a partnership or a sole proprietorship. Just like with partnerships, LLCs provide greater flexibility for the company’s management.Also, in an LLC you can allocate the way you want the profits to be distributed and it does not have to be based upon the percentage of ownership. Here is an example: There are two members in an LLC that own it 50/50. But one member is an investor only, who wants to protect their investment by controlling 50% of the company. But the other member is the one doing all the work and who wants more than 50% of the profit. Just write in the agreement that the working member gets 75% of the profits, even though they only own 50% of the business.Now we can see why a partnership and an LLC are completely different and separate legal entities. If you’d like more information about LLCs, contact us at LawTrades. We’re a legal marketplace for people to connect with high quality attorneys. We’ve helped 1000s of entrepreneurs with their legal needs by offering things like flat-fee pricing, free initial consultations, and 24/7 customer support. Best of luck w/ the business.
What is an S corporation?
The “S” refers to Sub-Chapter S of a particular section in the IRS Code. It allows a single person entity or a partnership to be treated like a Corporation for tax purposes. Two caveats, there can be no more than 100 shareholders and owners of the “corporation” must be treated like employees of the Corp and paid as a W-2 person, receiving “reasonable compensation” for the duties performed.There can be significant tax savings over a Schedule C sole proprietorship. For example, a successful business nets $60,000 a year. Under Schedule C, that full profit is subject to 15.3% Self-Employment tax. As an S-Corp, the owner is paid reasonable compensation. I had one client with such a business. His RC was determined to be $35,000. The $25,000 remaining earnings passed to him on Schedule E, subject to income tax, but not SE tax. After bookkeeping and payroll costs, his SE tax savings was $3,550. In both scenarios, the income tax was the same, but the self-employment tax was less.Reasonable Compensation is not a WAG or simply a % of the profits. It is a full-scale review of tasks performed by the owner which defines all tasks from CEO to janitor, applies time and average hourly rate to determine total compensation. A tax professional with an HR background can accomplish this with an extensive interview and a few hours computer research, or you can use a specialty company like RCReports to do the work for you.
Can a non-U.S. citizen form an S Corp?
If you are neither a US citizen nor a greencard holder, you cannot be the shareholder of S corporation.  The IRS list out the qualifications of S corporation -  the corporation must meet the following requirements:Be a domestic corporationHave only allowable shareholdersMay be individuals, certain trusts, and estates andMay not be partnerships, corporations or non-resident alien shareholdersHave no more than 100 shareholdersHave only one class of stockNot be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).To know more about S corporoation, you can read these two postss corporation electionFiling Form 2553
I am starting an international investment fund, should I set it up as an LLC or an S-Corp?
Quick Comparison: LLC vs. S-CorporationDifference in income allocation:While S-Corporation special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners. An LLC may offer several classes of membership interests, while an S-Corporation may only have one class of stock.Ownership restrictions:Any number of individuals or entities may own interest in an LLC. Also, LLCs are allowed to have subsidiaries without restriction. Ownership interest in an S-Corporation is limited to no more than 100 shareholders. On top of that S-Corporations cannot be owned by C-Corporations, other S-Corporations, many trusts, LLCs, partnerships, or non-resident aliens.Self-Employment Taxes:One advantage of S-Corporation is the way self employment taxes are calculated. S-Corporation owners employed by the company must receive salary, and their self employemnt tax is caluclated based on that salary (this is true with the exception of S-Corporations based in New York City). Owners of LLC, on the other hand, pay self employment taxes based on all member distributions they receive.S-Corporation:S-Corporation is a regular corporation that has 100 shareholders or less and that passes-through net income or losses to its shareholders for tax purposes (similar to sole proprietorship or partnership). Since all corporate income is "passed through" directly to the shareholders who include the income on their individual tax returns, S Corporation are not subject to double taxation.An eligible domestic corporation (C-Corporation) can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S Corporation. Generally, an S Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S Corporation's shareholders include their share of the corporation's income or loss.S-Corporation vs. C-CorporationAdvantages:Like C-Corporations, S-Corporations are separate legal entities from their shareholders and, under state laws, generally provide their shareholders with the same liability protection afforded to the shareholders of C corporations.Unlike C-Corporations, for Federal income tax purposes taxation of S corporations resembles that of partnerships. Thus, income is taxed at the shareholder level and not at the corporate level.Certain corporate penalty taxes (e.g., accumulated earnings tax, personal holding company tax) and the alternative minimum tax do not apply to an S-Corporation.Disadvantages:Unlike a C-Corporation, an S-Corporation is not eligible for a dividends received deduction (a tax deduction received by a corporation on the dividends paid to it by other corporations in which it has an ownership stake).Unlike a C-Corporation, an S-Corporation is not subject to the 10% of taxable income limitation applicable to charitable contribution deductions.Unlike a C-Corporation, ownership of an S-Corporation is significantly restricted (read next).Who Can Form an S-Corporation?S-Corporations are more suitable for small and family businesses, and for those who start their business with small investment. Also, some existing businesses qualify for S-Corporation status.To form S-Corporation or to change your existing C-Corporation into S-Corporation (also called " Election of S-Corporation Status") certain conditions must be met:S-Corporation cannot have more than 100 shareholders.All shareholders must be either U.S. citizens or residents, estates, or certain trusts.Can only have one class of stock. Preferred stock is not allowed.Profits and losses must be accorded to owners in proportion with their ownership stake.Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.Shareholders cannot deduct losses in excess of their investment.The corporation cannot deduct fringe benefits given to employees who own more than 2% of the corporation.Filing With IRS And The StateS-Corporation Election is filed with the IRS (Election by a Small Business Corporation, Form 2553), and that election is recognized by all states. with the exception of New York, New Jersey and Arkansas, which require additional state filing.S-Corporation AdvantagesForming S-Corporation generally allows you to pass business losses through to your personal income tax return, where you can use it to offset any income that you have from other sources.S-Corporation shareholders are not subject to self-employment taxes. These taxes, which add up to more than 15% of your income, are used to pay your Social Security and Medicare taxes.When you sell your S-Corporation, your taxable gain on the sale of the business can be less than it would have been had you operated the business as a regular corporation.Taxation of S-CorporationsAs already mentioned above, S-Corporations are not subject to corporate tax rates. Instead, S-Corporation passes-through profit (or net losses) to its shareholders and those profits are taxed at individual tax rates on each shareholder's Form 1040. The pass-through (sometimes called "flow-through") nature of the income means that the S-Corporation's profits are only taxed once - at the shareholder level. The IRS explains it this way: "On their tax returns, the S-Corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss".S-Corporations therefore avoid the so-called "double taxation" of dividends in most states. There are however two exceptions to this rule:California: There is a franchise tax of 1.5% of net income of an S-Corporation (minimum $800). This is one factor to be taken into consideration when choosing between an LLC and an S-corporation in California. On highly profitable enterprises, the LLC franchise tax fees, which are based on gross revenues, may be lower than the 1.5% net income tax. Conversely, on high gross revenue, low profit-margin businesses, the LLC franchise tax fees may exceed the S-Corporation net income tax.New York City: S-Corporations are subject to the full corporate income tax at a 8.85% rate. However if the S-Corporation can demonstrate that a portion of its business was done outside the city, that portion will not be subject to the additional tax.Retaining Profits of S-CorporationS-Corporations (much like regular C-Corporations) are allowed to retain their net profits as operating capital. However, all profits are considered as if they were distributed to shareholders, and as a result shareholders might be taxed on income they never received (whereas a shareholder of C-corporation is taxed on dividends only when those dividends are actually paid out).Converting S-Corporation Back to C-CorporationS-Corporation status is not permanent and can be reversed back if so desired. For example, if the business becomes more profitable and there are tax advantages to being a regular C-Corporation, S-Corporation registration status can be dropped after a certain amount of time.
Is it okay if I don't report income from my C-corp on my personal 2014 taxes, and instead do it on my 2015 taxes?
The income is going to be income to the corporation in 2014 that you are going to need to file and pay tax on. You haven't been clear about how you selected a fiscal year end for the C corporation. That topic is an issue which is going to need to be addressed by itself. When you say you took the $$ out of the company, there is a substantial likelihood that it is going to be treated as a dividend distribution from the corporation, taxable to you and non-deductible to the corporation to the extent of "earnings and profits'....a bad answer. You are not going to be able to go back and recharacterize the distribution as payroll without incurring penalties for failure to deposit payroll taxes. You will likely have some risk in attempting to treat the amount as a payment to an independent contractor as the sole owner of the corporation. How you proceed will actually depend on the amount of $$ involved.If its not substantial, I would probably just pay the tax and move on. You really need to consider why you haven't elected S Corporation status from the start.
What is the best way to file for C Corp taxes?
Yes you do have to file a tax return, even if you have no profit. Assuming you did not elect to have a fiscal year end for the corporation, then you file based on the period between when you incorporated and Dec 31. Beginning with 2016 year end returns, your C Corp return is Due April 15. Actually for 2016 returns the date is April 18, 2017, due to weekends and holidays.As other have mentioned an S Corp election might make sense for you, since the losses would flow through to your personal tax return, but I recommend you have a conversation with a tax professional first. If you intend to seek outside investors, then S Corp may not be your best option as you are probably more concerned about being attractive to investors rather than short term tax benefits. You have also already missed the window for an S Election, if you incorporated 6 months ago and would have to request late election relief. Probably not a huge hurdle, but one more thing you have to deal with. Also if you want to go S Corp the due date is March 15.
How do I file for an S Corp?
What Is S-Corporation And How To Form OneS-Corporation is a regular corporation that has 100 shareholders or less and that passes-through net income or losses to its shareholders for tax purposes (similar to sole proprietorship or partnership). Since all corporate income is "passed through" directly to the shareholders who include the income on their individual tax returns, S Corporation are not subject to double taxation.An eligible domestic corporation (C-Corporation) can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S Corporation. Generally, an S Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S Corporation's shareholders include their share of the corporation's income or loss.S-Corporation vs. C-CorporationAdvantages:Like C-Corporations, S-Corporations are separate legal entities from their shareholders and, under state laws, generally provide their shareholders with the same liability protection afforded to the shareholders of C corporations.Unlike C-Corporations, for Federal income tax purposes taxation of S corporations resembles that of partnerships. Thus, income is taxed at the shareholder level and not at the corporate level.Certain corporate penalty taxes (e.g., accumulated earnings tax, personal holding company tax) and the alternative minimum tax do not apply to an S-Corporation.Disadvantages:Unlike a C-Corporation, an S-Corporation is not eligible for a dividends received deduction (a tax deduction received by a corporation on the dividends paid to it by other corporations in which it has an ownership stake).Unlike a C-Corporation, an S-Corporation is not subject to the 10% of taxable income limitation applicable to charitable contribution deductions.Unlike a C-Corporation, ownership of an S-Corporation is significantly restricted (read next).Who Can Form an S-Corporation?S-Corporations are more suitable for small and family businesses, and for those who start their business with small investment. Also, some existing businesses qualify for S-Corporation status.To form S-Corporation or to change your existing C-Corporation into S-Corporation (also called " Election of S-Corporation Status") certain conditions must be met:S-Corporation cannot have more than 100 shareholders.All shareholders must be either U.S. citizens or residents, estates, or certain trusts.Can only have one class of stock. Preferred stock is not allowed.Profits and losses must be accorded to owners in proportion with their ownership stake.Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.Shareholders cannot deduct losses in excess of their investment.The corporation cannot deduct fringe benefits given to employees who own more than 2% of the corporation.Filing With IRS And The StateS-Corporation Election is filed with the IRS (Election by a Small Business Corporation, Form 2553), and that election is recognized by all states. with the exception of New York, New Jersey and Arkansas, which require additional state filing.S-Corporation AdvantagesForming S-Corporation generally allows you to pass business losses through to your personal income tax return, where you can use it to offset any income that you have from other sources.S-Corporation shareholders are not subject to self-employment taxes. These taxes, which add up to more than 15% of your income, are used to pay your Social Security and Medicare taxes.When you sell your S-Corporation, your taxable gain on the sale of the business can be less than it would have been had you operated the business as a regular corporation.Taxation of S-CorporationsAs already mentioned above, S-Corporations are not subject to corporate tax rates. Instead, S-Corporation passes-through profit (or net losses) to its shareholders and those profits are taxed at individual tax rates on each shareholder's Form 1040. The pass-through (sometimes called "flow-through") nature of the income means that the S-Corporation's profits are only taxed once - at the shareholder level. The IRS explains it this way: "On their tax returns, the S-Corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss".S-Corporations therefore avoid the so-called "double taxation" of dividends in most states. There are however two exceptions to this rule:California: There is a franchise tax of 1.5% of net income of an S-Corporation (minimum $800). This is one factor to be taken into consideration when choosing between an LLC and an S-corporation in California. On highly profitable enterprises, the LLC franchise tax fees, which are based on gross revenues, may be lower than the 1.5% net income tax. Conversely, on high gross revenue, low profit-margin businesses, the LLC franchise tax fees may exceed the S-Corporation net income tax.New York City: S-Corporations are subject to the full corporate income tax at a 8.85% rate. However if the S-Corporation can demonstrate that a portion of its business was done outside the city, that portion will not be subject to the additional tax.Retaining Profits of S-CorporationS-Corporations (much like regular C-Corporations) are allowed to retain their net profits as operating capital. However, all profits are considered as if they were distributed to shareholders, and as a result shareholders might be taxed on income they never received (whereas a shareholder of C-corporation is taxed on dividends only when those dividends are actually paid out).Converting S-Corporation Back to C-CorporationS-Corporation status is not permanent and can be reversed back if so desired. For example, if the business becomes more profitable and there are tax advantages to being a regular C-Corporation, S-Corporation registration status can be dropped after a certain amount of time.How To Form S-Corporation Online
I just incorporated a C Corporation on the 23rd of March 2017. Does the corporation need to file federal taxes by 04/17/2017?
No it does not, but you, in your capacity as the corporation’s officer/ director, have several important elections to make - and soon. Among them:The fiscal year end of the new corporation. (Most corporations elect December 31, but it could be any of the twelve month ends);S Corp election (assuming the corporation’s shareholders are U.S. persons);Accounting method election (e.g., cash or accrual);Section 1244 election (Loss on Small Business Stock);Tax treatment of organization costs (Section 248).… and many others, some of which are highly technical and cannot be addressed here in the Quora forum.As the other contributors to this page have urged, save yourself some grief and hire some competent tax and accounting help. Bring your checkbook.
Should a mobile app tech startup incorporate as a LLC or S-Corp? If so, why?
Usually the type of entity best for your particular business depends on your goals, what industry your company is in and a variety of other variables. Because each company is comprised of a unique blend of strengths and weaknesses, the smartest way to begin your venture is with a knowledgeable startup attorney who will guide you in figuring out what structure is most appropriate for your company. I’ll briefly discuss some characteristics for an LLC and a S-Corp though:LLCs are great if you want liability protection without all the formality as they are very easy and cheap to set up. There are also some publication requirements in most states though. A great feature for LLCs is that they are not taxed as an entity; members are taxed usually in ratio of their ownership percentages (pass through tax). But, if you're eventually looking to raise capital from investors this might not be the best structure for you. Typically, LLCs are not great for businesses looking for funding for a few reasons: (1) investors really don’t like pass-through entities; (2) the tax partnership rules are complicated; and (3) it doesn’t allow for stock option plans and convertible notes.S-Corporations are pass-through entities and, as such, are not subject to double taxation. They pay no corporate income tax and the profit and losses of the business are passed-through the stockholders, while the taxes are paid at the individual level. One negative about S-Corporations is the ownership restrictions they have such as not allowing more than 100 shareholders and requiring shareholders to be U.S. citizens or residents. S-Corps can also not be owned by other corporations, LLCs, or partnerships. Lastly, S-Corporations can only have one class of stock.Feel free to check out LawTrades for additional guidance about structuring your startup. We offer flat fee packages for startups to complete all of the necessities at once. Also, feel free to PM with any questions you have about how and where to form your company, and any related issues!