For more than 80 years, the attorneys of Powers & French, P.A. have assisted individuals, local and national businesses with business planning and commercial transactions. We provide a full range of transactional services to our clients, with particular emphasis on personal attention and cost-effective services, including:
- Forming a corporation, limited liability company or LLC, or partnership
- Ongoing clerk or registered agent services so our clients can focus on running their business instead of worrying about annual filing requirements
- Contract Preparation and Review
- Promissory Notes, Mortgages and Security Agreements
- Like-Kind Exchanges (1031 transactions)
- Owner Financing
- Commercial Leases
FREQUENTLY ASKED QUESTIONS: BUSINESS ENTITIES
WHAT IS A LLC? An LLC is a Limited Liability Company (not a corporation). It is a legal, business entity under Maine state law that has the flexibility of a partnership and the liability protection of a corporation for liability purposes. LLC owners are called members; an LLC manager is a member who manages the business.
HOW ARE LLCS TAXED? LLCs can elect to be taxed as sole proprietorships, partnerships, S Corporations or C Corporations, as long as they comply with the tax requirements for those entities. It there is one owner, an LLC most often is taxed as a sole proprietorship; profits and losses pass through the LLC and are reported on the owner’s personal income tax returns. If there are two or more members, an LLC must file a Form 1065, listing the LLC’s income, gains, losses, deductions, credits, etc. but not paying any tax. Each LLC member then must include partnership tax information on their individual returns and pay taxes on LLC earnings through their personal returns.
WHAT ARE THE BENEFITS OF FORMING A LLC? Like corporations, LLCs provide limited liability protection to their owners (members) by protecting them personally from liability for business debts and liabilities (although owners can be found liable for tort claims alleging negligence or fraud.) Creditors of the LLC cannot pursue the personal assets (home, bank accounts, etc.) of the owners to pay the LLC’s debts. Like partnerships, LLCs can provide pass-through tax treatment. Reporting LLC income on personal returns means that income is not reported, and so taxed, twice, as can occur with corporations. Single member LLCs that don’t operate an active trade or business also do not have to pay self-employment tax. The bottom-line profit of an LLC is not treated as earned income to members and so also is not subject to self-employment tax.
Unlike corporations, LLCs do not require much paperwork and there are no ongoing formalities such as annual meetings, officer elections, and minutes. While corporations must have boards of directors overseeing major decisions and officers managing daily operations simple record keeping, LLCs have none of these requirements. LLCs are flexible and can adopt any ownership/management structure – an LLC can be managed by a manager, all of its members, or a hired manager.
LLC status can heighten the credibility and stability of business; potential customers, employees, vendors, and partners recognize that you have made a formal commitment to your enterprise. Powers & French recommends LLCs especially for single owner businesses and to hold income-producing real estate.
As with any legal entities, it is important for an LLC to keep careful records, and to keep an LLC’s accounts separate from personal accounts. Accounts and stationary should reflect the LLC’s legal status (ie, Your Company, LLC should appear on checks, letters, invoices, websites, etc.)
WHAT IS REQUIRED TO FORM AN LLC? To form an LLC, you need an LLC name, members (one or more) and a manager (a member can also be the manager). The LLC must be registered with the Maine Secretary of State; this can be done online at www.maine.gov/sos/cec/corp/llc.html. LLC filings must include the name of the LLC, names and addresses of the members and manager, and the LLC’s Articles of Organization. A filing fee is required. Before filing, we recommend an online search to determine whether your intended name is already in use. Powers & French, P.A. offers a flat fee package for LLC formation; we also are happy to meet with you on a consultation basis to assist you in forming your LLC.
WHAT ARE ARTICLES OF ORGANIZATION? Articles of Organization detail how the LLC will be managed, including members’ voting rights and responsibilities, procedures for buying and selling ownership, and procedures for dissolving LLC. Customizing Articles of Organization to address the unique nature of your business can be vital. We recommend seeking legal advice on these details.
WHAT ARE THE OPERATING REQUIREMENTS FOR AN LLC? LLC operating requirements include an annual fee to state and filing a simple annual report, which confirms members’ names and addresses, and purpose of the LLC. The annual report can be filed online; there is an annual fee of $85. LLC operating requirements are considerably simpler than the operating requirements for corporations.
HOW ARE LLC MEMBERS COMPENSATED? LLC members are compensated either by distributions of profit or guaranteed payments. Members can pay distributions to themselves by writing checks; members cannot pay themselves wages. Guaranteed payments are earned income to members and can be treated as tax-favored fringe benefits. LLC members’ shares of the bottom-line profit is not considered earned income because members are considered to be inactive owners; as a result, distributions of profit do not qualify for fringe benefit treatment.
WHY NOT FORM A LLC? LLCs can be more expensive to form than corporations if they require unique and detailed Articles of Organization. It is more difficult to transfer ownership of an LLC than ownership of a corporation because all LLC members must approve any new members or changing ownership percentage of existing members. With corporations, ownership transfers are simply made by selling or creating shares of stock. For serious business ventures, investors may prefer a corporation to an LLC.
WHY DO SOME CORPORATIONS PAY “DOUBLE TAX”? Corporations can pay double tax because a corporation must file its own tax return and is taxed on its income. In addition, distributions to owners are taxed to the owner as income. Thus, funds are taxed twice: once to the corporation and once to the owner.
HOW CAN CORPORATIONS AND LLCS INTERRELATE? Corporations can be members of LLCs. This creates an additional level of ownership and allows the corporation to offer traditional fringe benefits like retirement plans. It also creates an additional level of protection from liability. Powers & French may recommend that a business owner form an LLC to own their real estate and a corporation to run their business. We also recommend LLCs in many instances where our clients hold rental income properties.
WHAT IS A CORPORATION? A corporation is a legal entity, separate from its owners. Corporations are treated as persons by the law. As a legal entity, a corporation offers liability protection to its owners. Corporations are bound by their Articles of Incorporation, as well as the law, and have specific duties and obligations to their shareholders and directors. Shareholders are the owners; directors operate the corporation. Shareholders must elect the directors annually. “C” and “S “are tax elections made after a corporation is formed
WHY INCORPORATE? Corporations offer limited liability, while partnerships and sole proprietorships do not. Corporations also reflect seriousness, greater credibility and stability for your business; potential customers, employees, vendors, and shareholders will recognize that you have made a formal commitment to your enterprise. Incorporation also can offer favorable tax treatment.
WHAT DO I NEED TO FORM A CORPORATION? Corporations must be registered with the Maine Secretary of State; this can be done online at www.maine.gov/sos/cec/corp/incorporating.html. Corporate filings must include the name of the corporation, names and addresses of the directors, number and ownership of shares, and the corporation’s Articles of Incorporation. A filing fee is required. We recommend an online search to determine whether your intended name is already in use. Owners also must obtain a tax identification number (EIN) and hold an initial meeting to select their tax status, elect officers and issue stock.
WHAT IS A C CORPORATION STATUS? A Corporation is a corporation that has elected C Corporation status with the IRS by filing Form 2553. C Corporation status is a taxation accounting treatment. Unlike a LLC, the corporation itself is taxed. The corporation’s income is taxed before dividends or distributions are paid. Powers & French recommends C Corporation status for businesses seeking venture capital and/or anticipating a large scale venture . If owners expect a new business to earn profits right away, C corporations can use these profits to expand and enhance the business without shareholders being taxed on their share of the profits, a significant advantage. C Corporations also have a more established and credible foundation for investors.
C Corporation employee salaries are deductible, as are fringe benefits. C Corporations can have more than one class of stock, so that shareholders can have different economic rights (such as receiving dividends or compensation at liquidation at different times and in different amounts). There are no shareholder and income limits as for S Corporations.
WHAT IS A S-CORPORATION STATUS? An S Corporation is a corporation that has elected S Corporation status with the IRS by filing Form 2553. S Corporation status is a taxation accounting treatment. For S Corporation status, a corporation can only have one class of stock and no more than 75 shareholders. All shareholders must be residents and individual entities (estates and trusts are acceptable, other corporations are not) and all must agree to the S Corporation election. There also is a limit on how much money S Corporations can earn from investments. S Corporations cannot be corporate subsidiaries, and some types of businesses are ineligible for S Corporation status, such as financial institutions and insurance companies. Failure to comply with S Corporation status requirements can result in loss of S Corporation tax treatment and subsequent ineligiblity for 5 years.
Powers & French recommends S Corporation status most often for small or new businesses. S Corporation status allows pass-through income tax treatment like a partnership: profits/losses of the business are reported by the owners personally on their individual tax returns. This treatment can be very helpful to new businesses that expect losses at start of their business. On the other hand, if a new business is profitable from the beginning, this treatment can result in higher taxation because the owners will have to pay income tax on their share of the profits, whether or not the profits are actually distributed to the shareholders.
The biggest S Corporation tax advantage is its payroll tax savings. S Corporations can divide profits into 2 categories: wages and leftover [distributive share]. Self employment tax is only due on wages. S Corporation losses can be used as tax deductions on a shareholder’s personal return, which is useful in the common situation of a new business experiencing losses some times as start-up. A single owner LLC not operating an active business does not have to pay self-employment tax so that, in most cases, S Corporation treatment would not make sense. S Corporation employee salaries are deductible, fringe benefits usually are not deductible.
S Corporation losses are passed through to corporate shareholders, but are not deductible for shareholders who have no direct participation in company. S Corporation status may be the best choice if a corporation’s plan is to pay shareholders all or most of profits. S Corporation status also can be a benefit for asset liquidation because the appreciated value of corporate assets is taxed on shareholders’ personal income tax return (instead of the sale being taxed to corporation and then taxed again when distributed to shareholders.)
WHAT DOES A CORPORATE AGENT DO? All corporations must have a registered agent, who is the person responsible for receiving service of any legal notices to the corporation. Powers & French, P.A. serves as the registered agent for many corporations, providing a registered office and contact for the Secretary of State, receiving legal notices and service of process, providing legal counsel for compliance with corporate bylaws and Articles of Incorporation, maintaining corporate records, conducting annual meetings or preparing waivers of such meetings, filing annual reports, and retaining lists of shareholders, votes, resolutions and actions by the board of directors.
WHAT IS A SOLE PROPRIETORSHIP OR GENERAL PARTNERSHIP? Sole proprietorships and general partnerships are businesses owned and controlled by one or more people. Each owner is personally responsible for the business, including all of the business’ liabilities, profits and losses.