An employer hires its employees with its application of various employment laws. The Fair Labor Standards Act identifies the minimum wage, age and overtime requirements in detail. However, all other aspects of the relationship in the employment process are dealt with and regulated by Federal and State laws. A few of them are as follows:
- C Corporations
- S Corporations
- Partnerships (Limited and General)
- Limited liability companies (LLC)
The stock of a C corporation can be owned by other business entities as well as by individuals too. The corporation owners may receive all the legal employee benefits and can have the benefits to be tax deductible to the corporation. Some of the major disadvantages are limited liability, efficiency to work with a large number of shareholders and the ease and legality of buying and selling its stock effectively.
One of the major disadvantages are that the profits are taxed at the corporate level, then the dividends and profits are taxed to the shareholders which eventually results in the double taxation of the hard earned profits. Annual reporting to the state, annual directors meetings with shareholders and the lack of privacy and franchise taxes at the state level are some of the other disadvantages too. Tesch Law Offices has experts who are well versed in these and can help you manage and make the right decisions at the right time for an effective business at all times.
The double taxation problem of the C corporation is eliminated, taxes on profits are paid only at the shareholder level. For tax purposes the Sub S corp is referred to as a “pass through” entity, meaning that tax liabilities pass to the shareholders. This is the major reason that Congress created the Sub S corporation status. But there is a limit to the number of shareholders and they generally must be humans. Shares cannot be held by other corporations (either C or Sub S), or by partnerships or LLCs. Trusts may hold Sub S shares but only with special provisions. Major advantages are the pass thru tax status, the ease of buying and selling stock, and the limited liability of the members.
Sub S corporations can have deductible employee stock ownership plans (ESOPs) and employee pension plans for both owners and non-owner employees. But many other employee benefits, when given to the owners of the S corporation, are not deductible to the corporation. Some disadvantages are the required annual reporting to the state and annual formalities such as shareholder and directors’ meetings, lack of privacy and franchise taxes at the state level.
Partnerships fall into two categories, general and limited.
General partnerships do not limit liability for any partner.
Limited partnerships limit liability for the limited partners but not for the general partner (the controlling or operating partner or partners). Lack of limited liability for all partners and owners is a major disadvantage of partnerships. In addition, limited partners have no vote or say in how the business is run. The LLC appears to be a better choice in all cases where a partnership might be considered.
Limited Liability Companies (LLC):
LLCs offer the best of both worlds by combining the limited liability feature of corporations with most of the advantages of partnerships. It is allowed to have a partnership tax classification where in there are at least two members. This makes it a viable entity for tax purposes. Partnership tax classification is a better arrangement than the viable tax status of major corporations as well. Unlike the S Corporation, any person or a legal entity can own its shares or units. The number of shareholders are not limited and all members get to vote unlike the limited partners. There is a limited liability for everyone connected with the LLC which is also unlike any other partnerships. Both the owners and the non-owner employees get to enjoy a deductible employee pension plan. LLCs also do not have the capital gains tax problem which most corporations do. But LLCs are required to do the annual reporting to the state whenever they are created. LLC is an excellent choice of entity for a wide variety of small business situations and is due for a much appreciated consideration.