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| Business Law - Frequently Asked Questions
How do I choose between forming an LLC or an corporation? What is an S Corporation? Can being taxed as a S Corporation save me taxes? Do I really need all of that legal boilerplate in my contract? Is my LLC required to have an Operating Agreement? Note: All answers below are based on Utah law, are for general information only, and do not contain a full legal analysis of the matters presented. QUESTION: How do I choose between forming an LLC or a corporation? ANSWER: The decision between forming a limited liability company (LLC) or corporation or another type of entity can be complex. You will want consider the current and future ownership and management structure of the business, future plans of the business, and taxes, among other things. We have prepared an article addressing many of the considerations, which can be accessed by clicking here. Return to top QUESTION: What is an S corporation? ANSWER: An "S Corporation" is a corporation or another type of business entity that has chosen an IRS taxation category for its business that is commonly referred to as "S Corporation". The S stands for small. Business entities that choose to be taxed in the S Corporation tax category do not pay income taxes directly. Instead, the income taxes of the business are paid by the owners of the business. An LLC can choose to be taxed as an S Corporation, in the same way that a corporation can choose to be taxed as an S Corporation. Return to top QUESTION: Can being taxed as an S Corporation save me taxes? ANSWER: In some situations, choosing to be taxed by the IRS as a S Corporation can be used to reduce the self-employment (or FICA) taxes paid by the business' owners. However, considerations other than the owners' saving on self-employment / FICA taxes might dissuade your business from choosing to be taxed as an S Corporation. In fact, many of the business owners we assist with their business entity formation do not choose S Corporation taxation. Here is a very basic explanation of how the potential tax savings is achieved for some businesses owners of S Corporations: When your business is taxed as an S Corporation, the business will pay money to you (the owner) in two ways: (1) As a salaried, W-2 employee/officer, with a regular paycheck, and (2) As an owner, with a dividend or distribution. Paycheck payments to you as an employee are subject to both income tax and FICA taxes. Dividend payments to you as an owner are subject only to income tax (not FICA taxes or self-employement tax). However, the IRS requires that you receive a reasonable salary as an employee for your services rendered to the business, in order to allow the dividend payments to avoid FICA/SE tax. What constitutes a reasonable salary is not defined in the code or regulations, but courts have looked at various factors, including (but not limited to) what comparable businesses pay for similar services, training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, and payments to non-shareholder employees. Return to top QUESTION: Do I really need all of that legal boilerplate in my contract? ANSWER: Including terms at the end of contract that are often referred to as "boilerplate" serve the important purpose of saving you time and money when disputes arise later. For example, disputing parties to a contract can spend thousands of dollars arguing in a lawsuit over whether the written contract is the entire agreement, which state's laws will be used to interpret the contract, which court has jurisdiction to hear the suit. It will be much cheaper to include the "boilerplate" terms in the contract than to argue about those issues when a dispute arises later. Click here to read our article about contracting considerations. Return to top QUESTION: Is my LLC required to have an operating agreement? ANSWER: We recommend that all LLCs have an Operating Agreement, but LLCs formed in Utah are not required by law to have one. Operating Agreements contain the terms of the business agreement between the members (i.e., the owners) of an LLC. Important issues are addressed in an Operating Agreement, such as: what limitations will we place on a member's ability to sell his or her membership interest (i.e., our ownership) in the business to someone else? or what happens if a member dies? or what percentage of votes will it take to agree to add a new member or sell the business? If your LLC does not have an Operating Agreement, state laws will decide these and other important questions for you, possibly in a manner that you do not like. Return to top Do you have other questions? Click here for our contact information. |
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The material on this web site is for general information only and does not contain a full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The viewing of this web site and the material contained herein does not create an attorney-client relationship with this Law Firm. Gregg K. Stepan is admitted to practice law in Utah and the District of Columbia. Christopher F. Lewis, Isaac D. Paxman, Richard N. Barnes, and Jonathan D. Bletzacker are admitted to practice law in Utah. |