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New Business Service

Selecting the best structure for your business is one of the more important choices you need to make because choosing the wrong entity type could cause you to lose a big chunk of your profits to taxes. At EJ Tax & Immigration Services, we provide business incorporation services and can steer you toward the entity that will minimize your tax burden. The knowledgeable financial professionals at our Elizabeth, NJ firm will clearly explain all your options so you'll feel confident that you've made the right choice.

 

According to the IRS, when beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file.

The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by state statute.

 

 Legal and tax considerations enter into selecting a business structure.

 

  • Sole Proprietorship's

  • Partnerships

  • Corporations

  • S Corporations

  • Limited Liability Company (LLC)

 

 At EJ Tax & Immigration Services, we help you to figure out how you pay taxes, your personal liability, and the amount and type or regulations encountered are dependent on the selection of your business formation. One of the most common choices is a Limited Liability Company (LLC). LLCs share many of the same qualities as an S-Corporation or C-Corporation while enjoying more flexibility and requiring less paperwork. But that's just a synopsis. Let's look at some advantages and disadvantages of LLCs to help you choose the correct business structure for you.

 

Advantages of LLC


Tax Flexibility:

EJ Tax & Immigration Services, has expert in taxation arena that are knowledgeable in tax regulation and law. Our professionals take the appropriate time to explain our clients how business entities are treated by the IRS based on the business structure. Our team also make sure to go through every legal aspect and taxation responsibility that you should expect before you form a business entity. Because based on the business structure, in this case an LLC, the IRS does not consider it to be a distinct separate entity for tax purposes. This means that, at least initially, the IRS will not tax the LLC directly. Instead, members of the LLC get to determine how they want to be taxed.

 

There are several options:
 

  • Single member LLC: This structure is taxed like a sole proprietorship. Profits or losses from the business are not taxed directly but instead are taxed through the single member’s personal federal tax return.

 

  • Partners in an LLC: Members elect to be treated like a traditional partnership for tax purposes.

  • LLC filing as a Corporation: The members of the organization may also choose to file as if they were corporation.


In fact, members of an LLC will create an Operating Agreement that outlines how the LLC will be treated for tax purposes, even though some LLCs are automatically classified as corporations by the IRS, so be mindful. Further information on how the IRS classifies some LLCs can be found at IRS.gov.

 

Disadvantages of LLC

 

Even though we have a lot advantage in the formation of LLC, we now going to clarify you some of the disadvantage of this type of business structure.

 

  • Self-Employment Taxes

  • Confusion About Roles such as (Director, Manager, and Employees)

  • Limited Life

 

Unless you choose to be taxed like a corporation, LLCs are usually subject to self-employment taxes. This means that the profits of the LLC won’t be taxed at the corporate level, but will pass through to its members who will account for those profits on the Form 1040 of personal federal tax returns. Without doubt, these taxes are higher than they would be at the corporate level. Individual members will pay for federal items like Medicare and Social Security. For this reason, if you do choose to start an LLC, it’s a great idea to speak to a knowledgeable firm, in this case EJ Tax & Immigration Services can explain step by step the accountabilities to compliance with tax law and regulation.

On the other hand, another issue that rise from LLCs business formation is that although corporations have specific roles (like directors, managers, and employees), LLCs generally do not. This can make it difficult for the company and especially investors to know who’s in charge, who can sign certain contracts, etc. Some of this confusion can be avoided by creating an LLC Operating Agreement.

Another weakness of the LLCs is that in many jurisdictions, if a member departs the LLC, the LLC ceases to exist. This is unlike a corporation whose identity is unaffected by the comings and goings of shareholders. Members of LLCs can combat this weakness in the Operating Agreement.

 

Another business structure is a Corporation which is a legal entity, organized under state laws, whose investors purchase shares of stock as evidence of ownership in it.

 

The advantages of the corporation structure are as follows:

 

At EJ Tax & Immigration Services, our professional expert makes sure that clients understand the tax liabilities and regulations that each business entity need to be in compliance with, before forming any business structure. After our clients be aware of the advantage and disadvantage of all business structures, our professional make sure that clients form the right business structure, based on the services that clients will provide or product that will sale.  

 

  • Limited liability: The shareholders of a corporation are only liable up to the amount of their investments. The corporate entity shields them from any further liability.

  • Source of capital: A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds.

  • Ownership transfers: It is not especially difficult for a shareholder to sell shares in a corporation, though this is more difficult when the entity is privately-held.

  • Perpetual life: There is no limit to the life of a corporation, since ownership of it can pass through many generations of investors.

 

The disadvantages of a corporation are as follows:

 

  1. Double taxation: Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.

  2. Excessive tax filings: Depending on the type of corporation, the various types of income and other taxes that must be paid can add up to a substantial amount of paperwork.

  3. Independent management: If there are many investors having no clear majority interest, the management team of a corporation can operate the business without any real oversight from the owners.

 

The biggest different between S-Corporation and C Corporations is that C-Corporation are subject to double taxation; that is, one tax at the corporate level on the corporation's net income, and another tax to the shareholders when the profits are distributed. In contrast, S Corporations have only one level of taxation. All of their income is allocated to the shareholders.

 

S corporation advantages

 

The advantages of an S corporation often outweigh any perceived disadvantages. The S corporation structure can be especially beneficial when it comes time to transfer ownership or discontinue the business. These advantages are typically unavailable to sole proprietorships and general partnerships. S corporation advantages include:

 

  • Protected assets. An S corporation protects the personal assets of its shareholders. Absent an express personal guarantee, a shareholder is not personally responsible for the business debts and liabilities of the corporation. Creditors cannot pursue the personal assets (house, bank accounts, etc.) of the shareholders to pay business debts. In a sole proprietorship or general partnership, owners and the business are legally considered the same—leaving personal assets vulnerable.

 

  • Pass-through taxation. An S corporation does not pay federal taxes at the corporate level. (Most—but not all—states follow the federal rules. View the Ongoing Corporation Requirements page of your state guides to see if your state recognizes the federal S corporation election.) Any business income or loss is "passed through" to shareholders who report it on their personal income tax returns. This means that business losses can offset other income on the shareholders’ tax returns. This can be extremely helpful in the startup phase of a new business.

 

  • Tax-favorable characterization of income. S corporation shareholders can be employees of the business and draw salaries as employees. They can also receive dividends from the corporation, as well as other distributions that are tax-free to the extent of their investment in the corporation. A reasonable characterization of distributions as salary or dividends can help the owner-operator reduce self-employment tax liability, while still generating business-expense and wages-paid deductions for the corporation.

 

  • Straightforward transfer of ownership. Interests in an S corporation can be freely transferred without triggering adverse tax consequences. (In a partnership or an LLC, the transfer of more than a 50-percent interest can trigger the termination of the entity.) The S corporation does not need to make adjustments to property basis or comply with complicated accounting rules when an ownership interest is transferred.

 

  • Heightened credibility. Operating as an S corporation may help a new business establish credibility with potential customers, employees, vendors and partners because they see the owners have made a formal commitment to their business.

 

S corporation disadvantages

An S corporation may have some potential disadvantages, including:

 

  • Formation and ongoing expenses. To operate as an S corporation, it is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation, obtain a registered agent for your company, and pay the appropriate fees. Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Although these fees usually are not expensive, and can be deducted as a cost of doing business, they are expenses that a sole proprietor or general partnership will not incur.

  • Tax qualification obligations. Mistakes regarding the various election, consent, notification, stock ownership and filing requirements can accidentally result in the termination of S corporation status. Although this is relatively rare, and usually can be remedied easily, it is still an issue that is not a factor with other business forms.

  • Stock ownership restrictions. An S corporation can have only one class of stock, although it can have both voting and non-voting shares. Therefore, there can’t be different classes of investors who are entitled to different dividends or distribution rights. Also, there cannot be more than 100 shareholders. Foreign ownership is prohibited, as is ownership by certain types of trusts and other entities.

  • Closer IRS scrutiny. Because amounts distributed to a shareholder can be dividends or salary, the IRS scrutinizes payments to make sure the characterization conforms to reality. As a result, wages may be recharacterized as dividends, costing the corporation a deduction for compensation paid. Conversely, dividends may be recharacterized as wages, which subjects the corporation to employment tax liability.

  • Less flexibility in allocating income and loss. Because of the one-class-of-stock restriction, an S corporation cannot easily allocate losses or income to specific shareholders. Allocation of income and loss is governed by stock ownership, unlike a partnership or LLC where the allocation can be set in the operating agreement. Also, the necessary accumulated adjustment account can be cumbersome to maintain, requiring input from an accounting professional.

 

 

Partnership advantages and disadvantages

 

A partnership is a form of business organization in which owners have unlimited personal liability for the actions of the business. The owners of a partnership have invested their own funds and time in the business, and share proportionally in any profits earned by it. There may also be limited partners in the business, who contribute funds but do not take part in day-to-day operations.

A limited partner is only liable for the amount of funds he or she invested in the business; once those funds are paid out, the limited partner has no additional liability in relation to the activities of the partnership. If there are limited partners, there must also be a designated general partner that is an active manager of the business; this individual has essentially the same liabilities as a sole proprietor.

 

The key advantages of a partnership are as follows:

 

  • Source of capital. With many partners, a business has a much richer source of capital than would be the case for a sole proprietorship.

 

  • Specialization. If there is more than one general partner, it is possible for multiple people with diverse skill sets to run a business, which can enhance its overall performance.

 

 

  • Minimal tax filings. The Form 1065 that a partnership must file is not a complicated tax filing.

 

  • No double taxation. There is no double taxation, as can be the case in a corporation. Instead, earnings flow straight to the owners.

 

The disadvantages of a partnership are as follows:

 

  • Unlimited liability. The general partners have unlimited personal liability for the obligations of the partnership, as was the case with a sole proprietorship. This is a joint and several liability, which means that creditors can pursue a single general partner for the obligations of the entire business.

 

  • Self-employment taxes. A partner’s share of the ordinary income reported on a Schedule K-1 is subject to the self-employment tax. This is a 15.3% tax (social security and Medicare) on all earnings generated by the business that are not exempt from these taxes.

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