Joint Venture
Acts like a general
partnership, but is clearly for a limited period of time or a single project. If
the partners in a joint venture repeat the activity, they will be recognized as
an ongoing partnership and will have to file as such, and distribute
accumulated partnership assets upon dissolution of the entity.
Corporations
A corporation,
chartered by the state in which it is headquartered, is considered by law to be
a unique “entity”, separate and apart from those who own it. A corporation can
be taxed; it can be sued; it can enter into contractual agreements. The owners
of a corporation are its shareholders. The shareholders elect a board of
directors to oversee the major policies and decisions. The corporation has a
life of its own and does not dissolve when ownership changes.
Advantages of a Corporation
1. Shareholders have limited
liability for the corporation's debts or judgments against the corporations.
2. Generally,
shareholders can only be held accountable for their investment in stock of the
company. (Note however, that officers can be held personally liable for their actions,
such as the failure to withhold and pay employment taxes.)
3. Corporations can
raise additional funds through the sale of stock.
4. A corporation may
deduct the cost of benefits it provides to officers and employees.
5. Can elect S
corporation status if certain requirements are met. This election enables
company to be taxed similar to a partnership.
Disadvantages of a Corporation
1. The process of
incorporation requires more time and money than other forms of organization.
2. Corporations are monitored
by federal, state and some local agencies, and as a result may have more
paperwork to comply with regulations.
3. Incorporating may
result in higher overall taxes. Dividends paid to shareholders are not
deductible form business income, thus this income can be taxed twice.
Subchapter S
Corporations
A tax election only;
this election enables the shareholder to treat the earnings and profits as
distributions, and have them pass thru directly to their personal tax return.
The catch here is that the shareholder, if working for the company, and if
there is a profit, must pay herself wages, and it must meet standards of
"reasonable compensation". This can vary by geographical region as
well as occupation, but the basic rule is to pay yourself what you would have
to pay someone to do your job, as long as there is enough profit. If you do not
do this, the IRS can reclassify all of the earnings and profit as wages, and
you will be liable for all of the payroll taxes on the total amount.
Limited Liability Company
(LLC)
The LLC is a
relatively new type of hybrid business structure that is now permissible in most
states. It is designed to provide the limited liability features of a
corporation and the tax efficiencies and operational flexibility of a partnership.
The owners are members, and the duration of the LLC is usually determined when
the organization papers are filed. The time limit can be continued if desired
by a vote of the members at the time of expiration. LLC's must not have more
than two of the four characteristics that define corporations: Limited
liability to the extent of assets; continuity of life; centralization of
management; and free transferability of ownership interests.
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