LLC vs corporation (incorporation, creditors, fees, liability insurance)

[HIF]

What are the pros and cons for each?

I'm looking at starting a property management company- will keep it small- one or two owners and two or three employees.

Also thoughts on having contract staff vs full time employees?

I'm just starting to put this together and will seek legal and accounting advice, but would like to have input from those who have been/are there now so that I don't miss anything.

[StealthRabbit]

Basically the most significant difference is that an LLC can be taxed as a 'pass-through' (Thru your personal income) or you can choose to file tax for an LLC as a corp (You elect this up front, and don't want to try to change it later, just create a new LLC if you need to change anything). A Corp WILL be tax filed as a Corp (Double taxation if you take personal income from 'taxed' corp income). Both entities offer liability shield (as long as you NEVER co-mingle personal funds). The LLC is less formal about annual meetings, share distributions..., but the Corp offers some benefits such as health care and retirement planning as 'pre-tax' expenses. There are also some differences in how you treat the assets held by each. (Such as not being able to get LTCG benefits on Corp held assets) . An accountant that is familiar with your proposed business and your financial objectives and obligations would be worth the $$ to consult. Remember there are different types of corps S vs. standard + special designations. It really depends on your annual sales, and needs for stock distribution / benefits / taxation.

Our LLC's cost us about $300 each to set up and Corp ~ $3000, but each have their unique purpose and benefits (and hassle). Some folks set each apartment space of a multi-unit into a separate LLC for liability reason. That seems a bit of a hassle, but one claim would make it worth it. With employees, you definately want a liability shield. (definately Not a Sole Proprietorship).

Contract help would be SO much easier if possible (Worker comp, liability, payroll, qtrly reports... HASSLE). BE careful, some states highly regulate contractors, and employers who are shirking responsibility by using them. In some cases they can only make a minority of annual income from you (or any single source). They usually MUST be self directed and bring there own tools and supplies... I.E. not someone who works from your specific instruction using your equipment and supplies. If you violate the above conditions yu may be liable for an ugly 'judgment'. That really eats up your earnings, but the contractors will be 'self-directed' when you are in jail

If you use contractors BE SURE to have them under a contract, and require that they are paying 'self-employment' worker's comp + have the required license and liability insurance to cover your responsibility to your customers. Rules vary by state.

[UpperPeninsulaRon]

Originally Posted by HIF

What are the pros and cons for each?

I'm looking at starting a property management company- will keep it small- one or two owners and two or three employees.

Also thoughts on having contract staff vs full time employees?

I'm just starting to put this together and will seek legal and accounting advice, but would like to have input from those who have been/are there now so that I don't miss anything.

The post of janb was very good information. Let me add a couple of thoughts. An S Corp should not have to cost $3,000 to set up. You can do it less expensively. A corporation also gives you personal protection against your own assets.

As janb points out, you really need to be careful about contract employees. It sounds great but you must be sure that they in fact fit the definition of a contract employee. A lot of states are really cracking down - and contractors can go to court and prove that they in fact are doing work which entitles them to be classified as an employee. Legal fees quickly overshadow FUTA and SUTA!

Since you are seeking professional advice, I'm sure your final decision will be a good one.

[aaauger]

A corporation does not guarantee protection of personal assets. Lawyers have succeeded in "piercing the corporate veil". 1) Treat your corporation as a separate legal entity: don't informally use its services, funds or property; use a separate address and email if possible, maintain the corporate minutes, etc. 2) Have adequate business liability insurance from a reputable carrier.

[windtimber]

A very important distinction is the nature of the ownership interest.

A shareholder owns stock in a corporation. Absent special limitations in the articles of incorporation a shareholder can sell or otherwise transfer their stock and you may end up in business with somebody other than the co-venturer with whom you began. Also, a shareholder's creditors can obtain ownership of his or her stock through judicial process. As a shareholder the creditor gets to vote for directors and otherwise exercise rights of ownership. Again, you'll have a new co-venturer - whether you want to or not!

A member of a limited liability company [LLC] owns a unique, personal interest in the company which can not be attached by a creditor. The transferability of membership interests is restricted. A transfer which is not approved by other members will result in the transferee obtaining a distributory interest, but will not have any voice in management or control of the entity. Also, a member's creditor can get a "charging order" such that any profit distribution will go to the creditor, but the creditor can not own or acquire the member's interest and, accordingly, can not obtain a voting or management interest.

An LLC assures you won't end up with an unexpected co-venturer.

[Humanoid]

Originally Posted by janb

A Corp WILL be tax filed as a Corp (Double taxation if you take personal income from 'taxed' corp income). Both entities offer liability shield (as long as you NEVER co-mingle personal funds).

Your income derived from a corporation is not "double taxed". Your pay is a deduction for the corporation hence it never pays taxes on it in the first place.

The only thing that is "double taxed" are things like dividends. But a corporation doesn't have to pay dividends...and can instead keep the money in the corporation. Where as a pass through entities is forced to realize the income on the members personal tax returns.

Anyhow, there really isn't a different in how LLCs and corporations are taxed. A corporation can file subchapter S and be taxed as a partnership (i.e., a pass through entity). A LLC can elect to be taxed as a corporation or as a pass through entity. The only consideration here is that S-corps restrict the number of shareholders and shareholders must be US citizens (people, not other business entities).

If you're a small business it doesn't make much sense to file as a corporation until everyone in the corporation starts making more money then they'd reasonably get paid as an employee of another company.

[HIF]

You all are great- thanks for such valuable information. You have given me a lot of answers, as well as helping me know what some of the questions that I should ask will be.

Just another reason that I have stayed on this site- subject experts on everything.

Thanks again.

[JL]

I have a few questions. Are there instructions to setup a LLC by yourself or should i go to an attorney? Some of my friends say that people can set it up themselves instead of paying like 600 bucks to an attorney. Also, i was thinking of creating several websites. Can i put them under this LLC? In other words, have xxx. com, yyy.com under the name of the LLC? Or should i separate each of them into another LLC for liability purposes? One of the main reasons for wanting an LLC is to not get sued down the road. The other issue is tax. How is the tax rate of an LLC vs me just starting a business by getting DBA name from courthouse? I suspect it would be much higher for LLC. Thanks.

[StealthRabbit]

Are there instructions to setup a LLC by yourself or should i go to an attorney?

probably ez enough to do yourself, find a friend in your state and use theirs as an example
I have one friend that used legalzoomDOTcom, and he paid about twice what mine cost through a lawyer ($350). I figure it was worth the $350 to avoid making an irresponsible mistake (I'm not terribly 'detail' oriented. I would do my own in this state from now on, unless there was something with high probability of litigation (trucking / explosives / private detective / retail or auto sales /, or if I planned to have employees)

You just have to
1) get an IRS EIN#,
2) prepare a couple sets of docs (articles of formation and operating agreement) and
3) file with the Sec of State (rules will vary by state)

should i separate each of them into another LLC for liability purposes?

only if you don't want to put the combined assets of all operations at risk.
If you think something is a cash cow, put it separate, as well as something with high risk. You probably want activities that are grossly unrelated in separate LLC's

How is the tax rate of an LLC vs me

no difference, LLC is typically a 'flow thru', unless specified to be taxed as a corporation (at inception)

[Tek_Freek]

When I started my business I called an attorney in the Yellow Pages (only one listed in the category I was looking for) and, of course, he had to call me back.

This man spent a half hour explaining the differences between corps and LLC's and asking questions about what I was doing, my future plans for the business, etc. He never did charge me for this time.

I ended up with an LLC because of liability issues. As it was explained to me anyone that decided to sue could only sue the LLC and that my personal assets would be untouchable.

The inital cost for three meetings and the paperwork was $700.00. Worth every penny.