Here’s my number #1 choice for most small businesses. I now regularly recommend they form an LLC that makes the S corporation tax election. But that wasn’t always the case. Read on and I’ll explain why.

In the past, I’ve been partial to S corporations and have operated my own law practice for many years as an S corporation. S corporations provide good liability protection and may provide significant tax savings with respect to the 15.3% FICA or Self Employment Tax if set up properly.

S corporations provide the same liability protection as regular corporations which have a long legal history in the courts with respect to liability and tax issues. This provides good predictability of the outcome when you go to court or fight with the IRS.

I still believe S corporations are a good entity choice for small businesses. So why do I now routinely recommend they form an LLC that makes the S corporation election?

Let me explain. LLC’s provide the same or similar liability protection as do corporations. LLC’s have now been around long enough that they are starting to have more predictability with legal and tax issues. If you form an LLC that makes the S corporation election, you can also save on the FICA taxes just like an S corporation. LLC’s tend to be more flexible and easier to operate than corporations. Depending on state law, it may be harder for creditors to get to the ownership interest of an LLC than it is to get to stock ownership in a corporation.

Having said all of that, you don’t go wrong with either an S corporation or an LLC, but my choice is to form an LLC.

Request a free consultation on the process of setting up a company in the USA.

There are many different methods used for trying to appraise the
value of a business and the value of shares in a corporation.
Note: An appraisal is merely an opinion and several different appraisers
may come up with different values.

The value of stock in a small corporation is really the value of the
business divided by the number of shares of stock issued. In valuing
the business, many factors should be considered. These may include
such things as the value of assets owned by the business, the net
profit of the business, the nature of the business, the competition,
whether the business is in a growing or declining industry, the
impact on the business of a shareholder who is a key person in the
business leaving, etc.

Note: Accountants or appraisers will almost always discount or reduce the
value of minority shares (shares with insufficient voting power to affect
corporate votes) in a small corporation. This is because the minority shares
usually are not able to control what happens with the corporation so the
shares are not worth as much as majority shares.

Methods for Valuation – One standard method is to have the
corporation’s accountant place a value on the shares of stock. If
either shareholder does not agree, then the disagreeing shareholder
can request a valuation from a second accountant and the two
valuations will be averaged. If the shareholders then cannot agree
on the valuation, the two accountants choose a third accountant to
provide a valuation and the three valuations are then averaged to
come up with a final valuation. Obviously, this process can get
expensive and is probably beyond the means of most small
corporations.

One simple approach is to require the shareholder leaving to place a
value on the shares. The shareholder remaining then has the option
to either buy the shares or sell his/her shares for the same price.
This forces the shareholder leaving to try to come up with a fair
price. The point is that if the shareholder leaving places too high of a
price on the shares, it will be to the advantage of the other
shareholder to sell his shares because he/she will be getting better
than market value. If, on the other hand, the shareholder leaving
places too low of a value on the shares, it will be to the advantage of
the other shareholder to purchase the shares since he/she will be
getting the shares for less than their market value.

For more articles on valuation of a business visit:
http://www.valuationresources.com/Publications/GeneralPubs.htm

As the company itself grows and becomes more valuable, the stock will likewise become more valuable. Stock issued after the company becomes more valuable will generally have a higher value placed on it by the directors of the company. The value of stock in a small private company is closely related to the value of the company, which fluctuates depending on the business.

Now at first this may sound like a very difficult task, but a business plan is simply a layout of your initial opening expenses, where you will open your business and how much it will cost you in living expenses and business expenses through the first year of business. One of the best ways to accurately plan for your business is to speak to others who have opened a business like yours and find out what expenses to expect.

When you have everything down on paper it will help you to keep track of everything that you need to take care of. You won’t forget anything if there is a list nor will you be surprised by something that you weren’t planning. You will want to have down the cost for advertising, promotional products, and if you need to do a tradeshow, that expense. You have to start getting business exposure and you want to budget for that.

When you are putting together your business plan you want to add all the details that you can. Even the smallest details will be a hassle if you forget them. Little things do add up too. So you don’t want to neglect listing all the small expenses that when added together are a lot. You have to have a budget for all of the things that you will need for daily business too. You need pens and pads of paper for business and you might as well have these customized to show your logo or business name and information.

For many people having a business is a long time dream that can finally come true. That is why you want to plan carefully and budget well. If you do tread lightly you will have a much greater chance of success. There are many factors that can make or break a business and the more careful you are and well informed the better off you will be.

There are wonderful promotional items that your customers will keep and use. There are thousands of things that can be used as imprinted products so you have plenty to choose from.

Article Source: http://www.articlealley.com/article_1363176_15.html
Author: JenB

Liability Protection. With respect to liability protection,
corporations (both C and S corporations) and LLC’s provide
the same or similar limited liability protection. It is sometimes
said that corporations may be more predictable because they
have a longer history of legal case precedent to help decide
issues of liability. Limited liability protection is also available in
limited partnerships and limited liability partnerships but these
forms are not frequently used for small businesses.

Special note: I often hear people say they have been told that an
LLC is easier to operate than a corporation because there are no
corporate formalities to observe. In my experience, this is simply not a
major factor since both small business corporations and LLC’s are
relatively easy to operate. I do not believe this should be a deciding
factor in most cases.

Tax Considerations. With respect to taxes, the best advice
is to project your net income for the next year or two and then
ask your accountant or tax advisor to calculate which entity
will provide you with the best tax savings. The information
provides some basic considerations:

If saving money on the FICA or the 15.3% self
employment taxes is important to you, an S corporation
may be the best entity of choice. The tax law requires
that you pay reasonable compensation to the
shareholders who work in the business. Many
accountants define “reasonable” to mean approximately
half of the net income of the business (this may vary
depending on the nature of the business and what
employees in similar businesses earn). The proper FICA
taxes must be withheld and paid on the compensation.
The rest of the income which is distributed to the
shareholders is not subject to the FICA taxes (it is,
however, still subject to income taxes). Most accountants
suggest that this same savings on FICA taxes is not
currently available when using an LLC.

Special Note: Some tax advisors are recommending the use of an
LLC which elects S corporation tax status. This is a fairly new
approach that might provide the benefit of reduced FICA taxes
coupled with the informal operating requirements of an LLC.

• If you plan to leave most of the earnings in the business
  for purposes of expansion, then a C corporation might be
  most beneficial. This is because the first $50,000 of net
  income in a C corporation is generally taxed at a lower
  rate than the individual tax rates of S corporation
  shareholders or members of an LLC. Thus, you can leave
  the first $50,000 of net income in the business and pay a
  lower tax rate. (You can leave net income in the business
  in both an S corporation and LLC but the shareholders
  and members will be required to pay income tax on the
  money at the end of the year, regardless of whether
  they actually received it or not, at their individual tax
  rates.)
• If you plan on losing money or borrowing substantial
  money in the start-up phase, you should consider an
  LLC which may allow you to write off greater losses
  than you could if operating as an S corporation or C
  corporation. That’s because you get a little better tax
  basis when using an LLC.
• There are some limitations on S corporation election. The
  rules require all shareholders to agree to S election and
  all shareholders must be citizens or permanent residents
  of the United States. S corporations are limited to 75
  shareholders and to only one class of stock such as
  common voting stock. Other entities such as corporations
  or LLC’s cannot be S corporation shareholders with the
  exception of a few types of special trusts.
• If you are planning on the business expanding rapidly
  and possibly going public, S corporations and LLC’s do
  not work as well. Even though you leave the net
  earnings in the business to expand it, you will have to
  pay income tax at your personal rate on the net earnings.
• If there is a need to distribute income and allocate losses
  on a basis different than ownership ratios, then an LLC
  may work best. An LLC operating agreement can
  provide for a different allocation of profits and losses. (S
  corporations must allocate profits and losses strictly on
  the basis of the ratio of share ownership.) For example, if
  some owners of the business need income but others
  need losses to write off against other income, an LLC
  allows the members to adjust these allocations based on
  their needs rather than strictly on ownership ratios.
  Some experts believe that a business involved in the transfer
  and sale of real estate in and out of the entity might work best
  in an LLC. (This does not include real estate agents or
  mortgage loan brokers who earn a fee for their service but are
  not transferring title to real estate in and out of their entity.)