LLC Or Incorporation

Comments(3)

• 
  DaveREI12th October, 2003

  depends on what you want....

• 
  iglooman12th October, 2003

  You can start with either or neither but eventually you will want a corporation for tax purposes. But, you gotta make some money first before this will matter.
  
  iglooman

• 
  flacorps12th October, 2003

  LLCs were more recently developed (starting in the late '70s in Wyoming), and for the most part enjoy numerous advantages over corporations, with the occasional disadvantage due to a legislative glitch here and there.
  
  Here in Florida my standard line is that LLCs are like Chicken Soup. Can't hurt.
  
  Let's go over a few things in Florida. LLCs cost a little more to form than corporations ($155 vs. $78.75 in state fees). But LLCs renew annually for $50 rather than $150, so you get that back ... and keep getting it back year after year.
  
  Corporations have name exclusivity. LLCs don't, and someone *might* be nuts enough to name his the same as yours ... but no self-respecting attorney would want to help him do that, and the IRS would make it tough for him to get a tax ID. It's not that big a worry, just a legislative glitch.
  
  If your LLC has only one member (owner), you've got yourself a "disregarded entity" for IRS purposes. Not a bad thing, but a two-edged sword. If you like not having to file an extra return, just a Sched C for your 1040, this option is for you. But if you ever get audited on a business issue, all your personal stuff is in the agent's file, and vice versa ... privacy is lost. If you want privacy, it's better to add someone, anyone, as part owner of your LLC, or failing that do an S Corporation.
  
  Speaking of S Corporations, what's the difference tax wise between them and an an LLC? Not much, or whole lots, it depends.
  
  An S Corp is like a partnership in a straitjacket. If you own 33%, you'll get 33% of the gains or losses on your K-1, no ifs ands or buts.
  
  The LLC was designed specifically for the purpose of trumping that result. It has "true partnership accounting principles" available to it. That means that the profit percentage doesn't necessarily equal the loss percentage doesn't necessarily equal the ownership percentage. What am I saying here?
  
  I'm saying that if you find a sweet deal and don't have cash but a lazy partner does ... you can structure a deal that works for both of you better than an S Corp would. Say the partner also makes a lot of money, and this project is a money LOSER for 2003. Say also for the sake of argument that you want to be equal partners if the investment liquidates.
  
  You could structure an LLC such that your ownership percentages were 50/50. But since the rich guy is "only" bringing money, he gets "only" 35% of the profits. Meaning you keep 65% for all your hard work, yada yada. Meanwhile, he's got use for the losses, you don't. So he gets, say, 75% of the losses (which will come mainly in the early going). Again, that's fair, he's putting in say 90% of the money! You get 25% of the losses.
  
  As long as these percentages you set up add up to 100 within their categories, and you follow some arcane rules about "substantial economic effect" (meaning it's not total gamesmanship, it reflects some economic reality amongst the parties), you can do this.
  
  How do you do it? You write it into the "operating agreement", another advantage the LLC has over the corp. For a corp, you'll do three different documents (minutes of the organizational meeting, bylaws, and shareholders agreement) to do the work done by one LLC operating agreement. And if you want your "corporate formalities" kept up to date so you don't lose your lawsuit shield, you'll keep holding annual meetings and documenting them. LLCs obviate the latter as well.
  [ Edited by flacorps on Date 10/12/2003 ]