Business Formation

Generally states require the filing of a corporations Articles of Incorporation, the initial franchise taxes, and corporate filing fees.

In order to create an LLC, articles of incorporation first need to be filed with the Secretary of State or similar government agency. Next, the LLC members need to enter into an operating agreement which sets forth the rights of the members and the rules for running the company. An LLC may also need to apply for a tax identification number with the IRS.

In all states, only one person is needed to form a LLC. Recent changes to the IRS code have promoted reforms in state laws permitting single-member LLC's. Single member LLC's file on IRS Schedule C.

Both entities provide the benefits of pass-through taxation to avoid double taxation of profits as well as limited liability for the owners. S Corporations pass-through income to the shareholders who pay no Self Employment tax on that income, While LLC income is subject to self employment tax. S corporations have restrictions which are not applied to limited liability companies. Limited liabilty companies cannot issue stock, but rather, they offer memberships. S corporations, issue stock and are owned by the shareholders. S corporations are managed by the directors and officers, while limited liability companies are managed directly by the members unless they hire managers.

Delaware is an easy state in which to incorporate and the annual cost is low. The Delaware law provides predictability and has been tested over years. Delaware has a separate Court of Chancery to handle corporation law cases quickly and competently. Delaware provides certain tax savings including favorable franchise tax rates. Non resident shareholders are not subject to Delaware taxation. Some say, Deleware courts liberally interpret corporation laws allowing favorable and more predictable decisions for corporations.

A limited liability corporation offers limited liability to its owners, but may elect to be taxed as a partnership which passes all the income and losses through to its owners. S Corporation can only have 100 stockholders and the stockholders cannot be corporations or non-U.S. citizens.

Delaware Corporations and Limited Liability companies can qualify to do business in all 50 states and foreign countries.

Incorporation can provide many benefits. The most important factor is that incorporation can help limit your personal liability as a business owner. Generally, creditors of your corporation must satisfy their claims by seizing the assets of the corporation rather than your personal assets. In contrast to a sole proprietor or partner in a partnership, you are financially responsible for all liabilities of the business, and your personal assets are subject to seizure or lien by creditors. Other benefits of incorporation can include greater tax deductions for pension and retirement expensing and funding, health insurance and medical expenses, lower payments for social security tax and medicare tax, and greater opportunity to raise capital for the business through the issuance of stock.

Yes. Corporations file an annual tax return on IRS Form 1120 or 1120S and usually a simple annual state report that updates information such as the address of the corporation and the names of its current officers and directors. Annual tax returns are also filed by general partnerships on IRS Form 1065, limited liability companies are also filed on IRS Form 1065. Single member LLC's are filed on IRS Schedule C, as well as sole proprietorships on IRS Schedule C.