There are four different core legal structures a contractor may select. Each has its own restrictions, advantages and distinct issues requiring knowledge to ensure the best selection. This article will cover the four different structures and the variables that give it advantages over the others. Each structure works well given certain underlying conditions. For a contractor, selecting the right structure will assist in maximizing profit and smooth operations.
A legal structure used in business allowed by all states that creates a distinct and separate entity by law is referred to as a corporation. Corporations can conduct business, be sued and sue because they are recognized by the courts as a unit with rights. Corporations require their own federal identification number and must pay for the right to conduct business within the state they reside. Two taxable types of corporations exist, first is the Regular C-Corporation and the second is the S-Corporation.
In the world of big business corporate earnings are taxed twice under the Internal Revenue Code. The first layer of taxation occurs with the traditional corporate income tax. The second tier of taxation happens when dividends are issued to shareholders. The shareholder pays an income tax at their personal rate.
When an entrepreneur starts out on his/her long journey of building a legacy with his business; he/she almost immediately focuses on the legal status of his business. Thoughts include: ‘Should I become a limited liability company or an S-Corporation?’; ‘What if I take on partners?’; ‘How do I get more capital without giving up control?’
‘The job isn’t done until the paperwork is complete’, a popular axiom used especially in business. It identifies with the requirement that every corporate entity maintain its legal status and understanding between all investors and the management team. These understandings are the essence of the “formation” of the corporate entity. Failure to do the paperwork can create legal snafus such as the loss of corporate protection for both officers and owners of the company
The common law definition of a business is an investment of capital or property by individuals which creates the means to carry on towards the goal of generating a profit. Every state recognizes different legal formats to conduct business. The simplest and most common is the sole proprietorship. Other forms include partnerships, limited liability company and of course corporation status (S-Corporation is a federal tax option of a corporation). However, two states actually recognize another legal format – business trusts.
Those corporations doing well and flush with cash sometimes buy back stock from their investors. Once purchased back by the company the stock is called treasury stock. However, in small business, buying back stock can significantly alter the entire corporate control ownership and impact the long term outcome and direction of the company.
Profit shifting in business is a term with two different interpretations. The more modern use of profit shifting refers to large multinational U.S. based companies shifting their respective profits to other nations with a friendlier and lower income tax rates. This article is written to explain the older and more traditional meaning of profit shifting specifically as it relates to small business.
There is multi-step process to establish a Limited Liability Company (LLC). You must first be recognized by the state of origin and then apply to the Internal Revenue Service to identify the particular tax entity arrangement. Both recognition processes have several steps involved. This article guides the entrepreneur through each of the steps to create a Limited Liability Company.
Dividends and distributions refer to the payment of cash to investors. Why are there two separate terms? Well, the term is tied back to the type of entity that makes the payment. Simply stated, regular corporations, i.e. C-Corporations as identified in the Internal Revenue Code use the term ‘Dividends’ and S-Corporations (Small Business Corporations) use the term ‘Distributions’. In addition to S-Corporations, other closely held business use the term ‘Distributions’ to identify amounts disbursed to the respective owners or beneficiaries. These forms of entities include Partnerships, Limited Liability Corporations, Trusts and Estates.
Although it appears relatively simple at first, it is slightly more involved than this and this article addresses the proper definition and context use when using these two similar terms. In addition, there are more differences between the two terms than just the source of the payment. For a full and detailed understanding of the terms, continue reading.