Planning for Closely Held Business Owners - 4 Types of Business Entity Structures

Question 1

What are some examples of different types of business entity structures?

Answer 1

1) S Corporations
2) C Corporations
3) LLC’s
4) Sole Proprietorship

Question 2

What are the characteristics of an S Corporation?

Answer 2

1. Shareholder-employees must be compensated with wages, subject to withholding.
2. Distributions, or dividends, must always be proportional to stock ownership.
3. Only one class of stock is allowed. Thus, the corporation cannot have preferred
   stock or any other class of stock that differs from another in any aspect other than
   voting rights.
4. Non-U.S. persons cannot be added as shareholders nor can a current “community
   property” shareholder marry a non-U.S. person.
5. Reasonable compensation must be paid to shareholder-employees.
   The S corporation structure is the ideal structure for a business desiring liability
   protection, corporate format, and flow-through taxation

Question 3

What is a C Corporation?

Answer 3

a legal entity that protects the owners’ personal assets from creditors. It can have an unlimited number of owners and multiple classes of stock

Question 4

What does the taxation of an S Corporation look like?

Answer 4

S corporation doesn’t pay any tax to the IRS. It is treated similarly to a partnership in that the income and deductions “pass-through” to each shareholder to be reported on their personal income tax returns in proportion to their respective shares of ownership

Question 5

What does the taxation of an C Corporation look like?

Answer 5

C corporation pays corporate income tax on its income, after offsetting income with losses, deductions, and credits

Question 6

What is an LLC?

Answer 6

LLC offers the advantageous
combination of flexibility and liability protection.
LLC structure would be appropriate for a sole proprietor seeking liability
protection without the creation of a corporate tax entity. The LLC would also be appropriate for a partnership seeking liability protection without the constraints and
paperwork requirements of the corporate structure.

Question 7

What does the taxation of an LLC look like?

Answer 7

a single-membered LLC (SMLLC) is treated as an entity disregarded as separate from its owner, so the owner will pay taxes for the business as part of his or her own personal tax returns.

Question 8

What is a sole