TO: Gloria Smithson
FROM: Kathleen Orosco
DATE: September 19, 2014
SUBJECT: Business Formation Options
This memo will outline several options that you may want to consider when you are creating your business. I have taken into consideration your concerns as well as the concerns of your potential investors and I have identified three business formations that I feel would be suitable for your needs.
Corporation
Corporations can range in size from one owner to thousands of owners. Shareholder can include family members and friends. Also, this is ideal for a company who is looking to expand globally. “Some privately held companies are large in size, such as S. C. Johnson & Son, Inc. (often referred to as “S. C. Johnson, A Family Company”), which is a global company with more than 10,000 employees.” (Cheeseman 481)
As a corporation, shareholders, who are the owners of the corporation, elect a board of directors and are able to vote on major decisions within the corporation.
A corporation offers protection by limiting your exposure to liability. If your company were to be sued, only the company’s assets would be at risk and not your personal assets. If you are a stockholder or an officer, your liability is limited to the amount of monies that you have invested into the company. “Setting up a corporation can also be an especially useful way to limit risks if you have one or more business partners. For example, if you are a professional with a partner who gets hit with a malpractice suit, the corporation will protect your personal assets. Wool, R. (1988).
A corporation requires much more work to create, and is more complicated to maintain. You will have annual reporting which would require financial data and performance review.
A major drawback to a corporation would be that you could be double taxed. There is a tax on the profits and then it is taxed again when it is paid to the shareholders.
Tax forms can be very complicated and may require the assistance of a hired tax professional.
Limited Liability Company (LLC)
If you choose this option, it will allow for several features that are beneficial when considering taxes as well as personal liability. With an LLC, you can have one or several owners with one managing member. The profits and losses are reported on the owner’s personal tax return. Because of this, the bottom line profit is not earned income. This allows for the monies to not be taxed under a self-employment tax.
This option also offers the owner the limited liability. As an owner you will have protection from any current or future judgments. ““The owners of interests in an LLC have been given the same protection as shareholders in a regular corporation. That is, their personal assets are not subject to the claims of business creditors” (Wells, 1994)
The downside to this option is that as a member of the LLC, you are not allowed to pay yourself wages. If you are a managing member, your share of the bottom line is then considered earned income, allowing that you pay a self-employment tax.
The LLC is also not able to become a public company. This could be a negative if you are looking to go public in the future and be listed on the stock exchange.
Limited Liability Limited Partnership