http://smallbiztrends.com/2011/10/time-to-change-business-structure.html (last accessed October 13, 2011)
Nellie Akalp writes for smallbiztrends.com about switching from an LLC to a C corp, a C Corp. to an LLC and a C Corp. to an S Corp. But instead of CHANGING your business structure, let me give you a preliminary breakdown of the differences in the entities in Georgia so you can do it RIGHT the first time. Changing and switching is possible—but it can be time consuming, frustrating and more expensive.
Kendrick Law Practice partnered with Attorney and CPA Mr. Jeff Gartzman to compile an online radio show version of what I am about to blog about. View the full audio interview and discussion at www.blogtalkradio.com/kendricklawpractice as well as other GREAT audio on a variety of subjects. Starting very soon, KLP will be co-hosting with Partners in our “Give and Take” Network to bring you even MORE information so stay tuned! More information about our partnerships can be found at www.kendricklaw.net/partnerships.
My Perspective: The KLP “run down”
So here is the deal- The differences in business entities break down to one simple common element: money. Who gets money, how much money is taxed and who gets sued for money. Without going much into taxes, because you can hear in detail from a CPA from our blogtalkradio show above, let me generally state the differences in GEORGIA entities ONLY! (Remember, I am only authorized to practice law in Georgia.)
Liability: You are personally open to UNLIMITED liability for acts on behalf of your business. Bad move. Because a separate business entity.
Formation: Nothing. Just open up for business.
Taxes: You will be taxed as an individual so you would fill out a Schedule C on your tax returns.
LLC (Limited Liability Company)
Liability: Your personal assets are limited TO THE EXTENT that you don’t “pierce the corporate veil.” Don’t know what that means? It gets complicated; listen to the blogtalkradio show at www.blogtalkradio.com/kendricklawpractice.
Formation: Filing of a Transmittal Form and Articles with the Secretary of State and a $100.00 fee.
Taxes: If you are a single member LLC, you will be taxed as an individual UNLESS you elect to be taxed as a corporation. If you are a multi-member LLC, you will be taxed as a partnership (each person get a K-1 at the end of the year to report their own distributions).
C Corporation (general corporation and non-profits)
Liability: Your personal liability is only up to the amount of your investment.
Formation: Same as LLC but with some required statutory language in the Articles. Consult an attorney.
Taxes: Taxed twice- Shareholders AND corporation will be taxed. How to get around this? Don’t declare dividends to your shareholders—but they may get mad.
Liability: Same as C Corp.
Formation: Same as a C Corp. but you have to fill out separate documents to APPLY to be an S Corp. AFTER you have been approved as a C Corp. This is both on the state AND federal level for tax purposes.
Taxes: Only taxed ONCE (versus C Corp.) but there are limitations like (1) You can only have up to 75 investors and (2) They all have to be individual investors (not institutional like banks) as well as some other limitations.
Liability: Parners are JOINTLY AND SEVERALLY liable for the debts of the partnershps. Want to know what “joint and several liability” means? Review the blogtalkradio show at www.blogtalkradio.com/kendricklawpractice.
Formation: Nothing. No paperwork. Just start doing business with another person. BEWARE: There are legal differences between a joint venture and a partnership so know which one you are doing.
Taxes: Each partnership reports their distribution on their taxes.
LLP (Limited Liability Partnership)
Liability: There are two (2) types of partners- General partners and limited partners. General partners have the same liability as a General Partnership (above); Limited Partners have the same protections as an LLC. BUT BEWARE! Limited Partners have limited liability but the tradeoff is that they must have limited management authority. Once a limited partner becomes involved in management, they become a General Partner and subject to the same liability as a General Partner.
Formation: Filing with the Secretary of State the same as an LLC. You have to set out in the Articles who the Limited Partners versus the General Partners are.
Taxes: Same as a General Partnership.
P.C. (Professional Corporation)
Liability/Formation/Taxes: Same as a C Corp. BUT limited to actual professionals so additional paperwork may be required. There is a statutory list of who qualifies but it’s not exhaustive so just because a professional is not on the list doesn’t preclude it from being a “profession” that qualifies for this type of formation.
WITH ALL OF THESE ENTITIES, SECRETARY OF STATE REGISTRATION IS JUST THE 1ST STEP. YOU STILL MUST OBTAIN A BUSINESS LICENSE IN THE COUNTY OF YOUR PRINCIPAL PLACE OF BUSINESS!
As always, Kendrick Law Practice is here to help you with your document drafting (including articles and by-laws), document reviewing (including agreements, business plans and marketing material), and negotiating services (between entities with more than one owner). Visit us online at www.kendricklaw.net/clientservices/getstarted.html TODAY to learn more.
Discussion Question: What Questions Do You Have About Business Formation?