hi Experts,
Why would one choose LLC over C corporation ?
Asset protection.
Corporate stock is considered an “investment”. As such it is subject to be awarded to satisfy a judgement. In the event you are personally sued, this would leave your adversary owning the stock of your corporation and therefore all of its assets.
Member interest in an LLC is considered personal property. As such is cannot be awarded to satisfy a judgement.
Both a corporation and an LLC protect you from the company’s liabilities, but only the LLC protects the company from your personal liabilities.
You can choose to have your LLC taxed as a corporation, but still retain its character an an LLC. This preserves your tax preferences while providing the greater asset protection.
Mark Wagner, CPA
very well-stated. thanks for the explanation ! I wasn’t awared of the stock and judgment through reading.
Hi lovetoknow,
You should know that your LLC is the best protection for your personal assets, but your real property is still partitionable and subject to liens and encumbrances. Take title in your LLC in a land trust and you are armor plated. Good luck.
Da Wiz
another good tip…thanks…
Does S Corp figure in here anywhere?
when choosing LLC or S-Corp, does it depend on what business one want to do?
for instance, real estate investment should have LLC whereas construction biz is filed with S-corp…Is this correct?
http://www.reiclub.com/forums/index.php?board=39
You might get more responses in this forum. Read through the posts and almost anything you need to know is there. If not, then you will get better answers to your specific questions there. Good luck.
Sunny: S-corp is a taxing decision; it does not effect asset protection decisions. Your LLC can choose to be taxed as a sole-proprietor, partnership, corporation or S-corp depending on the specific circumstances and your goals. This provides the tax outcome you desire while still giving you the stronger asset protection of the LLC.
Loveto: see above. You can have an LLC taxed as an S-corp. LLC is the way to go for asset protection regardless of what kind of business you are in.
Mark Wagner, CPA
mr CPA,
does it cost $ to change S-corp to LLC ?
In TX you cannot change your type of entity. You would have to set up an LLC, transfer assets from the Corp and then dissolve the Corp.
You are not able to change an S-Corp to an LLC in any state. The LLC has been knocked down in many states over the last few years and does not offer the level of protection that it used to. C and S corps do not hold appriciating assets well. I recommend a Limited Partnership holding all appriciable assets in land trust with a C corp as the general partner owning 1% of the Limited Partnership and you as the limited partner owning 99%. This offers the greatest tax and risk management.
Brandon Gay
Lionshare Investments Corporation
The asset protection features of an LLC are codified in state law. The only “knock down” possibility is for someone who is using the LLC structure inappropriately (ie: paying personal bills from the LLC or vice versa). This is not a failure of the LLC form, but a failure of the user to properly operate the LLC. This same failure is possible with the LP/Corp form of organization.
In addition, the LP/Corp form comes with both higher initial costs to set up and to operate and a higher hassle level; factors important to small investors.
For your buck, there is no better asset protection than a PROPERLY OPERATED LLC.
just had a chat with my tax accountant. He asked why would i want to open an LLC, it’s costly…whoa…that’s opposite of what i have read in this forum…Is it because he has old knowledge.
i have not heard of this. can you elaborate please?
Let me start by explaining myself. I’m a corporate structure specialist. I’m hired by businesses all over the country to help them set up their entity structure for the best risk and tax management.
Having said that, there is no one size fits all entity out there. It is totally up to the circumstances of the personal situation, goals, type of business, level of risk tolerance, and flexibility to change in the future, state of primary business and sophistication of incorporators or founding members. Some times a single-tiered system works best, and sometimes a multi-tired system works best.
Let me say this; an LLC is a hybrid. It is theoretically a great means of protection. For years it seemed to be a structure that stood strong in the face of scrutiny by the courts. As of the last few years, a number of courts have not given the LLC the protection it was thought to have. I’m not saying by any means that the LLC is not a viable business form. It operates well for some people. I will tell you that it is much more costly to operate in some states such as CA.
As for the business part of the LLC, it is with any business that one should not commingle funds. That should go without saying. LLC also has certain formalities that must be in place. They are not a stringent as the C corp., but are there nonetheless.
Because the LLC has not been around in most of the country but since the 60’s, it is just now coming of age as a business form.
If one wants true protection, the C corp. offers the greatest. It has been around since the 16th century in England. It has more case law than any other form and we know very well how the courts will act with regards to it. It is the most cumbersome to operate though. It also requires the greatest amount of sophistication.
Anyway, I said all of that to say this; one must truly decide what he or she really wants and properly structure themselves accordingly.
Brandon Gay
Lionshare Investments Corporation
The corporation and LLC are really different structures. For instance, the LLC usually has no shares, but the corporation must by definition have shares. Because of this, you cannot convert. If you want to use a multi-tier, the S-corp. can be a member of the LLC, but the LLC cannot be a shareholder of the S-corp.
As far as LLC’s being knocked down, for the time being, some state courts have not been kind to the LLC. That may change with time as the laws in state catch up with business, but for now, that is the way that it is.
Corporations do very well with depreciating assets. They do not do well with appreciating assets though. The best places to hold appreciating assets are the LLC or the Limited Partnership. The limited partnership is an interesting vehicle. I personally prefer it to the LLC. It offers the same protection of charging order. It has few formalities. It is very strongly upheld be the courts. It lends itself to multi-tier structure very well.
The idea of the structure that I told of in the post of the Limited Partnership with you as the limited partner is a very strong form. It does require a little sophistication. The C-corp. is the general partner and thus manages the entire LP. The charging orders protect the limited partner(s). If this is structured correctly, one can nearly be unbeatable in court.
Brandon Gay
Lionshare Investments Corporation
Well stated Brandon.
I prefer the LLC form because it is simpler (not as “sophisticated”?) for the average investor, doesn’t require two sets of books and returns and is, therefore, less expensive to maintain than the LP/corp form. Plus, you avoid all the corporate “paperwork” hassle, annual meetings, shareholder resolutions, etc etc.
Loveto, you can get a basic Texas LLC + operating docs for under $500. Filing fees (and therefore price) are the same for a TX Corp. I don’t know about all the other states, but I can’t imagine that it’s substantially more. (The LP, however, is higher in TX). And since you can choose to tax your LLC as a Corp, neither can he make the argument that the taxes are what’s “costly”.
Mark,
is it legal to register a corporation in nevada but actually do business in residing state (where business will run on a daily basis) ? I just ask my accountant in CA and it cost 600-800 to to set it up. Is filing fee for LP expensive ? Does LP pay tax ?
Legal, but not always practical.
First, you will have to pay for a registered agent in the state where registered. A state must have a real person and a real address in the state where it can serve process on the company if required. If you register in you home state, you can be that person/place yourself and avoid paying an annual fee to the agent. You lose a little bit of privacy that way, but…
To open a bank account in a state, you have to be registered to do business in that state. So, NV will usually work as long as you have a NV bank. If you want a “home state” bank, you will have to register as a “foreign” entity doing business in that state. Convenience is a major factor with banking, making an out-of-state bank a hassle. The fee for a foreign entity in CA is the same as being registered in CA.
Note that CA will hit you for state taxes for doing business there, even if you are registered in NV. You usually cannot avoid taxes in a state by being registered in another. The CA minimum franchise tax is $800, whether foreign or domestic.
Add to that, you would have to find a lender willing to work with an out-of-state entity.
An LP in CA is $70 (plus set up costs). Note, though, that an LP requires at least one general partner to assume all the liability; this is usually done thru a corp as GP. Therefore, you need the LP PLUS a corporation set up for an extra fee ($100 in CA). Also keep in mind that corporate standards are more strict than other entities: annual meeting, corporate resolutions before taking action, etc. And it will also require an additional tax return for the corp.
Once you have all that set up, the corp GP will be taxed as a corporation (S-Corp if you so choose) and the LP will be taxed as a partnership (pass thru to your personal return).
So, to summarize:
NV LP $250 (I think) plus setup
NV Corp $250 plus setup
registered agent in NV about $150 a year
register as foreign entity in CA $100 plus setup
2 tax returns
paperwork hassle
banking hassle
On the other hand, you can have a CA LLC for one fee, one tax return (taxed as a sole proprietor, partnership, C-Corp or S-corp to take advantage of whatever tax code you want), no paperwork hassle, in state banking, and so on.
THIS is why I recommend the LLC form.
A CA LLC is only $70 plus whatever someone charges to set it up for you. For comparision, I usually charge $150 plus the state fees for set-up. The answer to your next question will be “yes”.