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Questions about different entities

What is the difference between INC and LLC?

“LLC” and “Corporation” have many of the same characteristics. The most important characteristic they share is that they both offer limited liability protection to its owners. Typically, shareholders are not liable for the debts and obligations of the corporation; thus, creditors will not come knocking at the door of a shareholder to pay debts of the corporation. In a partnership or sole proprietorship the owner’s personal assets may be used to pay debts of the business. With an LLC, the members are not personally liable for the debts and obligations of the corporation.

There are many important differences between the corporation and LLC. The entities are taxed differently. An LLC is a pass-through tax entity. This means that the income to the entity is not taxed at the entity level; however, the entity does complete a tax return. The income or loss as shown on this return is “passed through” the business entity to the individual shareholders or interest holders, and is reported on their individual tax returns.

With a standard corporation, the corporation is a separately taxable entity. Corporations are treated as a separate legal taxable entity for income tax purposes. Therefore, corporations pay tax on their earnings. If corporate earnings are distributed to shareholders in the form of dividends, the corporation does not receive the reasonable business expense deduction, and dividend income is taxed as regular income to the shareholders. Thus, to the extent that earnings are distributed to shareholders as dividends, there is a double tax on earnings at the corporate and shareholder level. We can do S Corporation status election with IRS for $25.

What is the difference between a “C” and an “S” corporation?

All corporations start life as “C” corporations. As a benefit to small businesses, which meet certain criteria, the Internal Revenue Service allows them to apply (via form 2553) for “S” status. This means that the corporation will be taxed similarly to a partnership, with each shareholder reporting the profit or loss of the corporation on his personal tax return, in proportion to the percentage of shares he holds. This means that if there is a loss the shareholder can use it to offset his other tax obligations. If there is a profit it is taxed once, at the individual’s tax rate, rather than twice (a “C” corporation will pay a tax on profits and individual shareholders will be taxed again when those profits are distributed as dividends.) We can do S Corporation status election with IRS for $25.

Are there any drawbacks to being an “S” corporation?

The main negatives are the restrictions. There cannot be more than 100 shareholders; non-resident or non-US citizens may not be shareholders; and the tax year is somewhat inflexible (it usually must end on Dec. 31). Qualified trusts, or exempt organizations can be shareholders of an S Corporation. We can do S Corporation status election with IRS for $25.

What is the difference between an “S” corporation and a Limited Liability Company?

In terms of reporting income, they are quite similar. The LLC is somewhat less restrictive than the “S” corporation. There can be any number of members, and there are few restrictions on who those members may be. They are also a relatively new entity, so there is not as great a definitive body of tax rulings on them as there is with corporations. We can do S Corporation status election with IRS for $25.

Why incorporate as Close Corporation?

A business in the state of Nevada can be incorporated either under Nevada Revised Statutes Chapter 78 Private Corporations or Nevada Revised Statutes Chapter 78A Close Corporations. In order to file as a close corporation, NRS 78A.020 requires that the number of shareholders shall not exceed 30.

Why incorporate as a close corporation under NRS Chapter 78A? The vast majority of individuals incorporate their businesses in order to limit their liability to their investment in the corporation. Even if a business is incorporated, a shareholders personal assets my still be reached by creditors of the corporation in order to pay the debts of the corporation, including civil judgments against the corporation. This occurs when a court of competent jurisdiction pierces the ” corporate veil“.

The term corporate veil is a legal “terrm of art” for the state statutory protection limiting the liability of shareholders of a corporation to their investment in the corporation. A court can pierce the corporate veil for various reasons. One of the many reasons for piercing the corporate veil, and the one which is relevant at hand, is when the corporation does not strictly comply with the state’s strict statutory requirements for record keeping and the holding of meetings. A business incorporated under NRS Chapter 78 must strictly comply with the record keeping and meeting requirements promulgated under NRS Chapter 78 or risk having its corporate veil pierced by a court in a civil suit. In other words, a close corporation can be operated informally, while a business incorporated under NRS Chapter 78 must be operated formally.

A business incorporated as a close corporation under NRS Chapter 78A does not have to strictly adhere to the record keeping and meeting requirements of NRS Chapter 78. Consequently, a business incorporated under NRS Chapter 78A rather than NRS 78 has less of a chance of having its corporate veil pierced.

Another advantage of incorporating a business under NRS Chapter 78A rather than NRS Chapter 78 is that a close corporation is not required to have a board of directors, the corporation can be directed directly by the shareholders.

It must be pointed out that a business incorporated under NRS Chapter 78A is still governed by those provisions of NRS Chapter 78 which are not inconsistent with NRS Chapter 78A. Also, NRS Chapter 78 places restrictions on the transfer of stock in a close corporation which must be conspicuously printed on the shares of the corporation.