Q:

Subject: Basics of Corporations

Hello Kerry,

 

First of all, thanks so much for taking the time to put together and to post the Corporations Internet page. Your explanations are excellent, and so helpful!

 

I have a question, and I can only hope that you have a minute. Am I to understand that an LLC can protect personal assets much like a corporation can? My brother and I are starting a landscaping business (in NC), and of course it will be quite small (for starters)---just us two.

 

From what I'm reading, a simple LLC is the way to go, until we get a little bigger, and then we may want to consider an S-Corp. Will we still be protected as an LLC (assuming we have basic liability insurance for our business)? Just in general, for a small startup, would you advise an LLC?

 

Thanks so much for taking the time to read my questions. I hope you have a moment to respond. But in any case, thanks again for the great information you've posted!

 

Best Regards,

A:

As I always say, there is no such thing as a one size fits all for businesses.  Neither is it wise to base important decisions such as this on anything other than a direct consultation with a tax pro who understands how to set things up in the best way for your and your brother's unique circumstances.

That said, there are a few issues that need consideration in your email.  

First, it this true that the LLC entity, if used properly, can shield its members from personal liability in the same way as a corporation.

However, if you already see a need for an actual corporation down the road, I don't see the benefit of starting off with an LLC as a "bunny slope" towards your ultimate goal.  LLCs can't be converted into corporations.  They are technically different kinds of legal entities.  You would need to file brand new paperwork, and pay new fees, to charter your corporation.  I am not familiar with North Carolina's LLC and corp paperwork; but in many states, the LLC paperwork is actually more complicated and the fees are more expensive than they are for corporations.  It is also occasionally the case that the taxes on LLCs are higher than they are for corporations. That is definitely the case in California, which assesses a tax on LLCs based on their gross receipts in additional to the $800 per year minimum tax it hits corporations and LLCs with.  This may not be the case yet for NC; but states that are desperate for revenue do look to the PRC for ideas.

If you do choose to just skip the middle step and set up a corporation, be darn sure you have studied the issues I have raised regarding the pros and cons of C versus S corps.   If your business is going to show profits, S corps can end up costing you a lot more in taxes than will a C.  Your only mentioning LLCs and S corps leads me to believe that you haven't adequately analyzed this matter.

I have found that LLCs are very useful entities for joint ventures between people.  However, they make most sense as something that will last out the life of the project, and not as a stepping stone to a corporation.  Take a look at the credits of movies.  They are almost always set up as LLCs that are there to account for the expenses and income of that one project, which is a joint venture between various companies and individuals.  When the film and its revenues run out, the LLC is dissolved.  It is not converted into a new corporation.

That is just my opinion.  I'm sure there are some folks, especially professionals who earn fees by setting up LLCs and  corporations, who would love for you to try the LLC and then a corporation.  You'll be paying them to set up the LLC, to properly terminate the LLC, set up the corp, and possibly terminate the corp.  However, corporations do have potentially eternal life; and can last forever, unlike LLCs and partnerships, which are tied to the life span of their owners.

Those are just some issues to consider when you discuss this with a tax pro.

Good luck.

Kerry Kerstetter

Follow-Up:

Wow Kerry!

 

Thanks so much for the detailed response. It's so nice of you to take the time to do that, especially since I'm a stranger.

 

After I sent my e-mail to you, I re-read the pages on your site, and I did see how you had pointed out that the C-corp may be a better choice than the S in many cases, and I think that will be the way to go. Also, your response to me highlighted the fact that moving from an LLC to a Corporation is not a simple, or even natural, transition. You're pointing this out will save us a lot of headache. Thanks!

 

I will definitely take your advice, and talk to a tax pro in NC before making any moves. Thanks again for your kind responsiveness!

 

Best Wishes to you, and know that you're doing good work!

 

Thanks!

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/14/2005 10:31:00 PM Send this post: