Questions to ask..
Sole Proprietorship (not incorporated) – Did you know if you are a Sole Proprietorship (not an LLC, S-corp or C-corp) you can be held personally liable for what happens in your business? Even if you have an Employer Identification Number (EIN) also known as Tax Identification Number? This means, if your company is sued for any reason, all of your personal assets including bank accounts, cars, houses, personal jewelry, etc. all come into play and can be taken from you.
S and C Corporations – Did you know that if you have an S or C Corporation you required by law to have more than one individual assigned as corporate officers (e.g. one person cannot be the President, Secretary and Treasurer)? Stockholders/Shareholders must elect the directors who manage the business. The company must hold annual meetings, Board of Director Meetings, and Stockholder/Shareholder meetings and keep meetings of those meetings. In many cases the corporation is subject to double taxation. And, if additional capital is needed, it must be done by selling additional stock which have to be approved by the Board and Stockholders.
Limited Liability Companies (LLC's) – Did you know that an LLC gives you the same legal protection as an S and C Corporation? Your company is a separate entity from the owners as individuals. This protects your personal assets if the company is sued. You have the same great pass-through taxation benefits as a sole proprietorship. You have none of the restrictive aspects of the S or C Corps. No annual board, no minutes, and if your company temporarily of permanently needs money, no stock has to be issued! In my opinion, the LLC in most cases is the be best structure for a company, whether small or large.
Two important notes:
1. No matter what corporate structure you are, do not mingle your personal/household expenses in your company's bank accounts. In other words, do not buy personal items or pay personal bills through your company. If you do this, you will "Pierce The Corporate Veil" which means you will open yourself up to be sued personally and if you are ever audited by the IRS, they will automatically delve into your personal bank accounts. I can't stress this fact enough because I see it every day by big and small companies. If you are a S or C corporation, you must take the money out of the company in the form of wages, distributions, guaranteed payments or dividends. If you are an LLC, it is simpler because you just take equity out.
2. The second note is that I know this blog came across as an LLC being my preference, and I have to admit that it is my preference in almost every situation. The three main arguments I hear are, "I'm too large to be an LLC", of "My accountant said I shouldn't be an LLC", and "My attorney said I will not be protected". If my opinion is not good enough, keep this in mind…
The largest accounting firms in the country are LLC's (most have woken up and converted within the last 15 years). The largest is PriceWaterhouseCooper LLC which has more than 150,000 employees and did $34 Billion dollars in revenue in tax year 2014.
The 50 largest law firms in America comprising 66,340 attorneys, plus administrative staff, are LLC's or Limited Liability Partnerships (Equivalent to an multiple member LLC, but used mostly by the legal profession).
I know you trust your attorney or current CPA (or bookkeeper in most instances), but it might be time to evaluate the accuracy of the information you are getting.