A C-Corporation is the standard corporation most people are familiar with. It is owned by shareholders and is subject to federal securities laws with limited exceptions. The C-Corporation may not be ideal for owners of smaller businesses interested in limiting tax liabilities and retaining more personal control over the company’s operations. Limited liability companies and S-Corporations (corporations that qualify for pass through taxation) may be better options. If the intent is to seek major investment capital then a C-Corporation is probably the better choice. This is particularly so if the intent is to take the company public (selling shares of the company to the general public). Limitations on S-Corporations (only a single class of stock is allowed) and LLCs make these types of companies unappealing to venture capitalists. One of the primary advantages of the C-Corporation is the ability to issue different classes of stock.
In a C-Corporation, a board of directors is appointed that is required to hold annual meetings and keep minutes. Failure to maintain these and other corporate formalities puts shareholders’ limited liability at risk. To avoid having creditors and others “pierce the corporate veil”, many businesses hire outside companies or attorneys to manage corporate formalities. The C-Corporation is financed by its shareholders and/or outside investors, and has the potential to be a publicly traded company. The tax liabilities for C-Corporations and their shareholders are complex. C-Corporations pay taxes on their profits at the corporate tax rate and their owners are taxed on dividends, salaries and bonuses received (the dreaded double taxation). For companies that do not qualify for S-Corporation status, there are ways to limit this tax burden including salaries and bonuses to shareholders and the retention of earnings. However, there are limits to the amount of earnings a corporation can retain before facing penalties and on the amount of compensation the IRS considers reasonable.
One way to avoid the double taxation of a C-Corporation is for a corporation to make an election under Subchapter S of Chapter 1 of the Internal Revenue Code (Election by a Small Business Corporation, Form 2553). So long as the corporation qualifies for Subchapter S treatment, taxation will be passed on directly to the owners as individuals (pass through taxation). In short, the owners will be taxed as if they were a partnership or Limited Liability Company, or in the case of a sole shareholder, as a sole proprietor. The corporation itself is not subject to the corporate tax rate on its profits.
To qualify for a subchapter S election, the corporation must: be a domestic corporation; have only one class of stock; distribute profits and losses proportionate to each shareholder’s ownership interest; and be limited to no more than 100 shareholders who are natural persons and United States citizens. Spouses are automatically treated as a single shareholder and certain lineal family members may elect to be treated as a single shareholder. 501(c)(3) non-profit corporations and certain other tax-exempt corporations, trusts and estates may also be shareholders in an S-Corporation. In addition to these qualifications, there are limitations on tax deductible fringe benefits an S-Corporation can offer.
Nonetheless, for many companies any disadvantages are far outweighed by the pass through taxation available to S-Corporations. It’s also a good idea for those considering an S-Corporation to weigh the advantageous and disadvantageous of an LLC alongside those of the S-Corporation.
Most professionals such as lawyers, doctors and dentists are subject to additional rules when incorporating including professional licensing requirements, registration with the appropriate state agency, and adequate security and/or professional liability insurance for claims against the corporation. In addition all shareholders, officers, directors and owners of a professional corporation must be licensed professionals themselves.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is owned by its “members” and their ownership interests are generally not subject to securities laws. LLC members make all the decision for the company unless they hire an outside manager. Depending on state law and the LLC’s operating agreement, the sale of an ownership interest in an LLC will likely require the unanimous consent of the remaining owners or at least a significant percentage of them. Like the S-Corporation, the LLC is taxed at the individual income tax level. The formalities of operating an LLC are not as involved as with a corporation. Particularly, LLCs generally do not require an annual meeting. LLC members invest in their company initially and for additional capital investment with cash and/or financing.
Professional Limited Liability Company (PLLC)
Professional Limited Liability Companies (PLLCs) are professional companies similar to LLCs. Like the Professional Corporation, a PLLC is formed by professionals such as accountants, attorneys, physicians, dentists and architects. State law dictates which professions may form a PLLC. Like the Professional Corporation, all members in the PLLC must be licensed professionals themselves. Limited liability is afforded the professional members except for liability incurred by their personal actions. For instance, an attorney member in a PLLC cannot shield himself from his own malpractice. Adequate malpractice insurance is thus still necessary.
Limited Partnerships are entities consisting of at least one general partner and at least one limited partner. The general partners manage the business’ day to day operations and are liable for the debts and obligations of the partnership. However, the general partner in a limited partnership may be a Corporation. The limited partners are not allowed to participate in the management or control of the business. The limited partners risk is limited to what they invest in the partnership. A partnership agreement is required which spells out the rights and obligations of both the general and limited partners. Because of the nature of the limited partners’ investment, losses are subject to “passive activity loss” and “at-risk” tax rules which place limits on loss deductions for investments that are considered passive and/or are not considered to be at-risk. The partnership itself is not taxed. The general partners are taxed on the individual level based on their share of the profits or losses and their income earned as managers of the partnership. Unlike corporations, Limited Partnerships cannot retain annual earnings for future investments.
The General Partnership is the most like a sole proprietorship. All partners are liable for the debts and obligations of the partnership, and are taxed on the individual level. Losses are therefore deductible. All partners may share in the management and control of the partnership. The general partnership entity is less formal than incorporation and may be formed with or without a partnership agreement, although a written agreement is always advisable. A general partner generally requires the consent of all partners to sell his or her interest in the partnership.
Most business owners today find the need for a contract distracting. They understand the necessity, but have little patience for the time it takes to negotiate terms or the cost of hiring and working with a lawyer. Yet contracts are a necessary part of business, and their function is critical. Contracts memorialize agreements between people with the main goal of enforceability, and a well drafted contract helps to avoid costly litigation in the future. At The Law Office of Richard W. Hartman III, we understand the hesitation business owners have in contacting an attorney. They fear being drawn into a long and costly negotiation process full of inefficiencies and uncertainty, and find the option of a hand shake with another party tempting. We are committed to alleviating any hesitation and providing our clients efficient and affordable representation in a relaxing atmosphere.
Whether negotiating a sales, employment or commercial lease contract, the lawyer’s function should be to simplify the process for the client as much as possible while simultaneously ensuring that the contract will be enforceable and that all of its terms accomplish the client’s goals. The client knows what they expect to gain from the contract and what they expect their obligations to be, and it’s the attorney’s job to ensure that the contract meets those expectations. At The Law Office of Richard W. Hartman III, we focus on our client’s expectations and business goals when drafting, reviewing and negotiating contracts. We work closely with our clients to evaluate the issues most critical to them and to evaluate the parties’ relative bargaining positions. Doing so increases attorney efficiencies which ultimately benefits our clients.
At The Law Office of Richard W. Hartman III, we recognize that a business’ “bottom line” is impacted by legal costs and fees, and we are committed to providing our clients affordable legal representation without sacrificing quality and personal service. We offer no charge or low cost initial consultations, and once retained our first priority is to obtain results in an efficient and cost effective manner.
Richard W. Hartman III founded The Law Office of Richard W. Hartman III, Attorney & Counselor at Law, PLLC to provide clients with honest, ethical, efficient, quality legal services.
Mr. Hartman began his career with a boutique trust and estate law firm, concentrating his practice in the administration of trusts and estates, which included the preparation of fiduciary accountings for trustees, executors and conservators. While working with that firm he also represented fiduciaries and beneficiaries alike in litigation involving challenges to the validity of wills and trusts, as well as protecting the interests of beneficiaries. Mr. Hartman also spent a considerable amount of his time with that firm assisting clients with guardianship and conservatorship matters.
Through those experiences Mr. Hartman came to desire a better way to serve clients and practice his profession. It became clear that offering his professional services directly to the general public was the best way Mr. Hartman could assist clients while maintaining the highest ethical and professional standards for himself, his work product, and his firm. This realization led Mr. Hartman to form The Law Office of Richard W. Hartman III, Attorney & Counselor at Law, PLLC.