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Richard
Richard, Attorney
Category: Business Law
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Experience:  32 years of experience practicing law and a businessman.
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I was wonder what the best legal entity I should form. I'm

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Hi, I was wonder what the best legal entity I should form. I'm looking to immediately form a business to provide First Aid/CPR training. I would have a couple of people (also instructors), teaching classes independently, but paying me a fee to use the company name and equipment.I also would like to have a business for real estate activities. Is it better to form two separate businesses or one, with "sub" businesses under the same umbrella? Wondering which one is easier for tax purposes and for liability insurance.

Hi! My name is Richard & I will be helping you today! It will take me a few minutes to type a response to your question. Thanks for your patience!

First, I would form a separate entity for each because the same reason you set up a limited liability entity to protect your personal assets, mandates that you set up a separate entity for each business...to prevent a problem with one business from contaminating the other.

Second, with respect to your choice of entity, there are several options.

The basic choices of limited liability entities are: 1) Limited Partnerships; 2) Limited Liability Companies; and 3) Corporations.

1) In a limited partnership, the limited partners have no personal liability for the debts and liabilities of the partnership, but the general partner does; that's why typically a limited liability is formed to act as the general partner. Partnerships are not tax-paying entities and their income and losses flow through to their partners.

2) LLC's are limited liability entities. They are typically taxed as partnerships with their income and loss flowing through to the members. None of the members are personally liable for the debts and liabilities of the LLC. They offer the same flexibility as a partnership in allowing for preferential allocations of income and loss.

3) Corporations can be C corporations or S corporation. They are both limited liability entities and the members do not have personal liability for the debts and liabilities of the entity. S corporations are taxed as partnerships with their income and loss flowing through to the shareholders. C corporations pay tax as an entity.

Finally, the big difference between corporations and LLCs is tax-related. A regular C corporation would probably not be your option due to the fact it's not a flow through entity and could create a possibility of double taxation for you. Both the LLC and the S Corp are limited liability entities meaning your personal assets would not be at risk for the debts and liabilities of your entity. And, both are "flow-through" entities for tax purposes...meaning that the entity does not pay taxes; rather the operations of the entities flow through to your own personal tax return. The LLC is more flexible as it allows for preferential allocations of profits and losses, but if you are a single owner, that probably doesn't make much difference. The LLC also is a bit less cumbersome administratively as your filing requirements. And, unlike an S Corp, the LLC is not required to have formal meetings and keep minutes of those meetings. The biggest issue with the LLC is that as the owner of an LLC, you are considered to be self-employed and must pay the 15.3% self-employment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. With an S Corp, if you work for the entity, you must pay yourself 'reasonable compensation.' Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as 'wages.' Unlike an LLC, where you are subject to employment tax on the entire net income of the business, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a 'distribution' which is either taxed at a lower rate or or not at all depending upon the particular facts. BUT, as shareholder, you must receive reasonable compensation. If you get greedy by paying yourself a lower salary with the resulting higher distributions, you risk the reclassifying your distributions as wages. Typically, the best solution is to form an LLC and then elect for it to be treated as an S Corp for tax purposes; this results in the best of both worlds...the flexibility of an LLC and the advantageous self-employment tax treatment of an S Corp. :)

Thank you so much for allowing me to help you with your question. I have done my best to provide information which fully addresses your question. If you have any follow up questions, please ask! If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service as Good or Excellent (i.e., 4 or 5 stars)(hopefully Excellent/5 stars!). Otherwise, I receive no credit for assisting you today. I thank you in advance for taking the time to provide me a positive rating!

Customer: replied 1 month ago.
Excellent! That was very helpful. One follow up. When do I elect to have the LLC treated as an S Corp? When I form the LLC or when filing my taxes?

When you form your LLC.

Richard and 3 other Business Law Specialists are ready to help you
Customer: replied 1 month ago.
Excellent! Thank you, sir!

You're very welcome! It's been my honor and privilege to help you with this. If I can help you in any way in the future, I'll be happy to help. For easy access, my bookmark is: www.justanswer.com/law/expert-legalbeacon/ . Or, simply request “Richard only” in the first line of your question.

Thank you so much for the 5-star rating! I know rating takes an additional step and I truly appreciate you taking the extra time!