In today’s fast-paced business world, it is essential for business owners and managers to carefully consider the legal structure best suited to the enterprise. The selection of one of the essentially arbitrary forms of business association may be one of the most important decisions a business makes as it may determine the taxes the business will have to pay, its exposure to liability, the ease or difficulty of raising capital, its ability to grow and expand, and possibly its survival. From a legal perspective, the business often is the entrepreneur. In a lifetime of work, an entrepreneur may establish several businesses—hopefully all successful, but with no guarantees. Not only do businesses begin and end, but also the entrepreneur’s family, or the way the business is conducted, may change. A given form of doing business-ownership structure may be optimal at one time, but ill-suited to a later situation. Thus the ability to select and change to an optimal business ownership structure is critical not only when starting a new business, but also over the life of the small business, and for a larger enterprise, at the subsidiary or divisional level. This “big picture” concern for the totality of business ownership and its impact on the entrepreneur’s personal liability, tax situation, and ability to raise capital, makes the choice of a business entity an important, if not critical management decision. Yet this management perspective is quite different from that of the legal advisor, who is often concerned solely with the technical legal aspects of the entity form and may see it as a largely neutral choice among various forms of incorporation.
Understanding Domestic Corporations
The domestic corporation is the most common and widely recognized type of business. It is the type of business that comes to mind when most people think of large companies and corporations. A domestic corporation is a business that is incorporated within a single state in the United States. It is referred to as a regular corporation and is taxed separately from its owners. This means that the owners of a domestic corporation are partially protected from business debts because their personal assets will never be touched to pay for debts accrued by the business. This is a big advantage for domestic corporations over partnerships and sole proprietorships because the business structure itself is responsible for the debt accrued and not the owners of the corporation. The formation of a domestic corporation involves applying for a charter as a corporation in the chosen state. The corporation will then draft up its “articles of incorporation” which will detail the company’s name, location, business purposes, and intended life span of the corporation (some corporations are disassembled after the completion of a particular project). This document is then filed and approved by the state’s secretary. After approval and the payment of a filing fee, the corporation will receive a corporate charter and can then proceed with appointing directors, issuing stock, and entering the operational stage. The taking of an S-Corporation election is also an option for domestic corporations. This makes the corporation exempt from being taxed at a corporate level. Instead, the profits/losses of the corporation are divided and passed through to shareholder(s) and taxed at an individual income tax level. This option is good for small domestic corporations that plan to operate with only a single owner and is also increasingly beneficial as there is no longer a difference between a regular corporation and an LLC in most states.
Exploring Limited Liability Companies
Limited Liability Company or an LLC is a relatively new form of business entity which has become quite popular in the late 20th and early 21st century. It was first recognized in Wyoming in 1977 and is a hybrid of a partnership and a corporation. The primary benefit of an LLC is the fact that its members are afforded the limited liability protection only afforded to shareholders in a corporation. This means that members in an LLC are not personally responsible for debts and obligations of the LLC. An election may be made for the LLC to be treated as a corporation for tax purposes or the LLC can use the default classification of a partnership. An LLC taxed as a partnership offers an advantageous approach to avoid double taxation. The income earned by the LLC is not taxed at the entity level and is only taxed once it is distributed to members. This form of taxation allows for the possibility of avoiding potential tax on income that is to be reinvested into the company.
Duality. In the United States, business entities are formed in a number of different manners. Please see the link to the Secretary of State’s office in your specific jurisdiction for more information on how to form a certain business entity. This essay will focus on two of the more popular forms of business entities, domestic corporations and limited liability companies. The primary distinction between the two entities is the tax implications and treatment. A corporation may elect to be an S corporation which enables the corporation to use an alternative to the federal corporation income tax. An S corporation is a corporation which (1) is a small business corporation, (2) is a domestic corporation, (3) does not have ineligible corporations as shareholders (e.g. other corporations, an LLC, partnerships, or certain trusts), (4) has no more than 75 shareholders and only has one class of stock, and (5) makes an election which is consented by the shareholders on a form prescribed by the IRS to be treated as an S corporation. S corporations do not pay tax on their income but rather pass income and its consequential tax obligations to shareholders.
Comparing Domestic Corporations and Limited Liability Companies
The liability protection for owners is another area in which LLCs and domestic corporations differ. While both types of entities usually protect the owners from personal liability for the debts and obligations of the entity, the liability protection for owners of domestic corporations is sometimes not as effective. This is because of the rules regarding what constitutes piercing the corporate veil for domestic corporations and LLCs. Piercing the corporate veil is the legal term for disregarding the LLC or corporate form and holding the owners of the entity personally liable for its debts and obligations. Usually, this occurs due to fraud or commingling of personal and business assets, but the rules for what constitutes piercing the corporate veil vary by state and by entity type. Due to the newness of the LLC form, these rules are more established for domestic corporations, and there are some states in which there is no corporate veil protection for LLCs. However, generally, there is more protection for the owners of LLCs who do not engage in the acts mentioned above.
For example, comparing the two types of entities, there are more similarities between LLCs and S Corporations than there are between LLCs and domestic corporations. LLCs and S Corporations are similar in that they are both pass-through entities for tax purposes. This means that the income or loss of the entity is passed through to the owners, who report the income or loss on their personal tax returns. The owners of both LLCs and S Corporations are only taxed once on the income of the entities. This differs from the tax status of a domestic corporation, where the corporation is taxed on its income, and the owners are taxed a second time on any dividends paid to them by the corporation.
Domestic corporations and limited liability companies are the most common forms of business entities. They are popular because they provide personal liability protection to the owners, that is, the owners are usually not personally liable for the debts and obligations of the entity. There are a number of similarities between the two types of entities, and some areas where the two types of business entities are quite different.
After realizing that it is too difficult to incorporate a business using their name, many principals will opt to operate a limited liability company using the same name. This option is much more feasible for the principal as the name of a limited liability company need only be distinguishable upon records of the state that show the limited liability companies in Florida. This means that the same name can be used for a limited liability company that is already being used by a corporation. This being the first instance of an advantage to a limited liability company, the principal has already successfully named his company without trouble or state interference.
A domestic corporation and a limited liability company are very similar in terms of what they can accomplish; however, they are quite different in the actualities of getting to that point. Both of these options can be used in order to further a business, make money, and accrue wealth for the principals; however, all these steps come with different results in all areas. The first decision that is made with either option is choosing the name of the business. When operating a domestic corporation, the name of the corporation must differ from any other corporation in the state of formation and the name cannot be the same, or deceptively similar to, another corporation’s name already operating in Florida. The Secretary of State has the power to determine whether a name is deceptively similar, often causing frustration to principals trying to incorporate their business. This decision can be taxing to someone attempting to incorporate their business as they may find that their name has already been taken after expending effort to successfully incorporate their business.
