Corporate Formation Structures
A Sole Proprietorship is the simplest business structure and is basically a business that is owned by an individual. Because of this, they are the easiest business to start-up. However, organizing a business as a Sole Proprietorship leaves the owner personally liable for all of the legal and financial liabilities of the business. Unlike a corporation with it's built in asset and liability-limiting protections, when a sole proprietorship is sued, the owner's personal assets are put at risk of seizure. Moreover, all business income is taxed as the owner's personal income, and there are fewer tax benefits or shelters than those afforded by an incorporated businesses.
A partnership exists when there is more than one owner of a business, and that business is not incorporated or organized as a limited liability company. The partners share in the profits, losses, and liabilities of their enterprise, with the percentages dictated by written agreement. The partners could be individuals, corporations, trusts, other partnerships, or any combination of these examples. One of the biggest disadvantages is that the owners have unlimited liability for all legal debts and obligations of the company. Additionally, each of the partners acts as a representative, and as such, can commit the company to obligations without approval of the other partners. Liability caused by one partner leaves all partners vulnerable to lawsuits. Further, the tax advantages aren't as significant as they are with a corporation. Business income and losses are reported on the individual tax returns of the owners.
While similar to a “General Partnership” in some ways (the business has two or more members, agreement among the partners) the Limited Partnership (LP) offers its “Limited” partners asset protection and a shield from personal liability. One partner may be the “General” partner and the other may be the “Limited” partner in an LP. The General partners are exposed to personal liability to the same extent as they would be in a General Partnership. In other words, the General partners may be personally liable for the acts of the other partners in their dealings with third parties.
The Limited partners, however, may benefit from personal asset protection to the extent that they are not managing the partnership and will only be liable up to the amount of their investment in the company.
Another business structure worth considering in Nevada is the Limited Liability Company. Just like with a corporation, the LLC protects your personal finances, home, vehicles, and other assets. In addition, both structures allow a business to borrow money and sell equity in order to raise capital. Both stay in existence until they are dissolved, without need for periodic renewal, and both LLCs and corporations need periodic renewal.
A limited liability company, or "LLC" allows for certain favorable tax treatments, as well as personal liability protection, for the "members" involved. It is important to note that the specific structure and status can vary from state to state so complete consideration of the state's laws in which the LLC will be formed is crucial. An LLC as a business structure model allows for multiple owners, or "Members," and a "Managing Member," to enjoy limited liability. The Managing Member is typically the figure head of the organization and is responsible for it's management. The profits or losses of the business organization pass directly through to the member's personal income tax returns.
Both the S corp (but not other types of corporations) and the LLC offer pass-through tax treatment when it comes to federal income tax.
The LLC is a little less formal in its requirements in terms of annual paperwork to be filed, Board meetings, and minutes to be recorded. And whereas you are limited to 100 shareholders with the S corp, there’s no limit to how many members you can have with the LLC. LLCs do not have shareholders, but rather members that have a percentage of ownership based off of their contributions to the LLC.
Also, the LLC allows you to pass through more loss than the S Corp on your personal taxes, most notably when it comes to real estate.
Currently, the LLC filing fees in Nevada are $75. You are also required to file an LLC Initial List, which costs $150, which is the same cost to file your Annual List for your LLC.
A traditional Corporation (or a "C" Corporation) is a business structure that is created as a separate, distinct legal entity from its owners (or "shareholders"). Once a corporation is formed, the corporation can have it's own bank accounts, own property, conduct business, and even establish a line of credit, irrespective of the individual accounts or credit of the shareholders. The primary advantage to having a business formed as a corporation is the fact that the shareholders are not personally liable for the debts and legal liabilities incurred by the corporation. For example, if a corporation is sued for business reasons and loses, the shareholders will not be required to satisfy the debts of the corporation from their own personal assets. This safeguards assets and properties of the individual shareholders, and as such, is more attractive to potential investors.
An S Corporation (named in such a manner because of it's organization meeting the IRS requirements to be taxed under Subchapter S of the Internal Revenue Code) is a corporation that is structured in such a manner as to provide a pass-through entity for tax purposes, much like a partnership whose income or losses "pass through" to the individual shareholders' personal tax returns (in direct proportion to their investment or ownership in the company), while still providing the same protections for assets and from liabilities as a traditional corporation. The shareholders will pay personal income taxes based on the S corporation's income, regardless of whether or not the income is actually distributed, but they will avoid the "double taxation" that is inherent to the traditional corporation (or "C" corporation).
Pass-through taxation: An S corporation is not a tax-paying entity. By incorporating as an S corporation you are saying to the IRS that your company will not pay any taxes; instead the company’s income will “pass through” to the company owners/shareholders, who will be required to report that income on their individual tax returns.
- Reduction in self-employment tax liability: If you are a sole proprietor or owner of an LLC, you have to pay the double-share of self-employment taxes because in the eyes of the IRS, you are both the “employee” and the “employer.” Incorporating a business as an S corporation gives you the ability to re-classify your status: you only have to pay taxes as an “employee.” Instead of paying double self-employment taxes, the S corporation allows your company to pay you a salary (and you’re required to pay self-employment tax on that salary amount), and also give you a “distribution” of company earnings that are free from self-employment taxes. You can save thousands of dollars on your taxes, depending on your income and tax bracket, however, realize that S corporations are still required to pay payroll taxes on any wages they pay employees,including shareholders that are employees.
Right now, the fee for filing your Nevada corporation starts at $75 (it is based on the number of shares you will have). You will also need to pay $150 to file your Initial List. Each year, you will need to file your Annual List for $150.
Groups of certain professionals can form corporations known as professional corporations or professional service corporations ("PC"). The list of professionals covered by professional corporation status differs from state to state; though it typically covers accountants, engineers, physicians and other health care professionals, lawyers, psychologists, social workers, and veterinarians. Typically, these professionals must be organized for the sole purpose of providing a professional service (for example, a law corporation must be made up of licensed attorneys); professional corporations enjoy most of the limited-liability benefits as do the more traditional corporations.
Nonprofit Corporations are formed in order to conduct activities and transactions for purposes other than shareholder financial gain, while at the same time providing the same asset protections and limited liabilities of a standard corporation. A nonprofit corporation can make a profit, but this profit must be used strictly to forward the goals rather than to provide earned income (in the form of dividends) to its shareholders. It is understood that most of the transactions and activities of a Nonprofit Corporation will not be commercial in nature.
PDF of a Quick Reference Chart