2 Important Questions To Ask Before Electing S-Corp Status For Your LLC

I’ve been getting a number of questions regarding what’s best for a person’s business. The S-Corp or C-Corp? The LLC? A B-Corp, perhaps? When it all comes down to it, there’s really no perfect answer, and every case has to be looked at on an individualized basis. But one thing is for sure, there are bound to be questions as soon as a client learns about the possibility of electing S-Corp status for their LLC. For some reason, this idea of having an LLC that is treated like an S-Corp is some kind of revelation for our clients who feel like maybe, just maybe, this is a way to dodge the tax man or somehow outsmart the IRS.

While there are a number of important factors to consider, this is a quick blog post—not a one-on-one discussion with a business attorney, accountant, or tax attorney regarding your company. Accordingly, we’ve distilled the numerous factors down to just two of the most important.

  1. What is the Difference Between Electing S-Corp Status and Organizing as an S-Corp? The most important fact to keep in mind when considering an S-Corp election for your LLC is to remember that you are not reorganizing your LLC as an S-Corp—you are simply choosing a different tax treatment. The type of business entity you are organized as is a legal distinction while the type of entity you choose for taxation purposes is a tax distinction. So, if you have a single-member LLC without the S-Corp election, your business will be considered an LLC for legal purposes and a disregarded entity (or sole proprietorship) for tax purposes. Further, if you have a multi-member LLC without S-Corp election, your business will be considered an LLC for legal purposes and a partnership for tax purposes. Finally, no matter how many members your LLC has, if you elect S-Corp status, your business will be considered an LLC for legal purposes and an S-Corp for tax purposes.
  2. What are the Tax Benefits to Electing S-Corp Status? Well, the tax benefits depend on the number of members you currently have in your LLC. Most prominently, for all LLCs, being classified as an S-Corp for tax purposes can mean you no longer have to pay individual self-employment tax, which can turn out to be big savings. However, choosing S-Corp status also reduces your tax flexibility for a multi-member LLC because the partnership style tax status multi-member LLCs enjoy gives the members a lot more leeway. If tax benefits are the main focus of your reason to elect S-Corp status for your LLC, which they should be, you have to consider your individual needs and definitely talk to an accountant before making the election (but always have an attorney draft the necessary formation documents).

Image Courtesy: loop_oh

Why Your Home State May Be the Best Place to Incorporate a New Business

There’s one question I’m asked more often than any other when I’m counseling clients about business formation. What is the best state to incorporate a new business? There are the usual choices, of course. Delaware, Nevada, and Wyoming. These states all provide a number of benefits to the up and coming entrepreneur. Tax perks, rich history of corporate law, extra protections for corporations and the individuals who incorporate them.

But are those states really right for your business?

Any decision about where to form your new business entity obviously has to be made on a case by case basis. As an attorney, I’d be doing you a disservice to tell you that you absolutely must form your corporation or LLC in one particular state because, let’s face it, different business entities need different things and what works well for one company will be exactly the wrong thing for another.

What I can tell you, however, is to consider your home state as a frontrunner along with the usual top three choices. Our law firm is located in California—a state widely regarded to be, shall we say, less than friendly to small businesses. Except for tech startups. California is plenty friendly to those. In any event, California has high taxes, some foolish laws, and some courts have a penchant for trying to hold the officers and directors liable the debts of the business. Aside from all that—its a perfectly good place to incorporate your business.

So you’re a new business owner who wants to form a corporation. Say its a plumbing company. You live in California, you’re licensed in California, your employees all live and work exclusively in California, your shop is in California. You can see where this is going—you’re totally tied to California for your business. But you decide you want to incorporate your business in Delaware because a friend of a friend told you that’s the place to do it. Tax breaks, good law, whatever reason you have. If you decide you want to incorporate in Delaware, you’re going to have to pay for the incorporation there, file all of their paperwork, pay at least their minimum taxes, and so on. But, because you’re operating your business entirely in California, California is going to require you to register as a foreign corporation in California. Why? Because you’re transacting intrastate business here. And you’re going to have to pay for the registration here, file all of the paperwork, pay California’s taxes, and so on.

Sound like a good idea?

I didn’t think so.

That’s just one situation where it may be better to form your new corporate entity in the state where you’re actually conducting business. There are others, but that’s a topic for a one on one conversation with our clients. If you’re considering starting your own business and are looking for an attorney to help walk you through the process from start to finish, give us a call and we can put you on the right track—no matter what state you’re interested in.

Image courtesy: Robert S. Donovan

How to Pick the Perfect Name for Your Business

What’s in a business name? A lot, surprisingly. And it’s something far too many entrepreneurs fail to dedicate time to when starting a business. Sure, in the mind of a team putting together the next great internet startup, a name doesn’t really mean much when there’s the big picture things to think about: the business plan, the coding, and the website design and functionality. But a business name is something that should be at the forefront of any businessperson’s mind from the moment they take that first step toward incorporation. Hopefully this article will help to shed some light on the importance of picking a great name the first time—lest there be unforeseen repercussions down the road.

To many, the name of your business is just the thing you wrote down on articles of incorporation or the articles of organization at the time you formed your business. Maybe you spent a few minutes thinking about it—maybe you spent a few hours. But the real question is: Did you consider the branding implications, the marketing prospects, and the complete integration of your business around your name? Didn’t think so.

You see, the name is more than just the name of your business entity. For many entrepreneurs, it also extends to everything their company produces. The website address, the product name, and (what unfortunately becomes a sticking point for many businesses later on) the trademark. Because so much hinges on the business name, you want to make sure you get it right the first time. Changing a name because of trademark issues can be detrimental to your business—and having to settle for a less-than-perfect website address can spell doom for an entirely web-based startup.

So what should you keep in mind when naming your new business? Here are a few questions you need to ask yourself when choosing a name for your business.

  • Is Your Business Name Already Taken? When you decide to form a business entity, you’re going to have to register with some Secretary of State office. At the time of registration, there may be another company with your chosen name—at which point you’ll have to come up with a new business name. Instead of thinking you’ve found the perfect name from the beginning, why not save yourself from disappointment by picking a few possible names and ensuring they’re not already taken in your chosen state.
  • Are There Any Laws Against The Use Of Your Chosen Business Name? Some states have laws regarding what can or cannot be used in a business name. Generally, these laws are designed to prevent use of deceptive business names, but additional laws could cause problems too, so make sure you read the applicable rules and regulations regarding business names before you try and register.
  • Is A Domain Name Available For Your Business Name? Chances are you’re going to want a web presence for your business at some point. Do you really want to have to resort to a .net or .biz domain name? Or worse, has someone registered all of the top level domains for your chosen business name, leaving you to register a domain name that only vaguely resembles the name of your business.
  • Is The Business Name Able To Be Trademarked? This is a big one for companies that want to protect the goodwill associated with their name (which should be every company). If you’ve chosen a name for your business that can’t be trademarked, you may have a tough time trying to protect your business down the road. And if you’re taking your business around the world, make sure you can trademark your business name in places beyond just the United States. This applies to product names, too.
  • Will The Business Name Subject You To Trademark Infringement Claims? Have you decided to name your new company something deceptively similar to another company that already has a very strong presence in the field? If so, you may be inadvertently subjecting yourself to trademark infringement claims. Not a good thing. Make sure you’re not picking a name that is clearly designed to sound incredibly similar to your competitors.
  • Does My New Business Name Mean Something Weird In Another Language? This is kind of silly, but take a page from Ikea when naming your business (and your products) and try to make sure the name isn’t some vulgar word or phrase that could get your company into trouble when you branch out to foreign markets.

But, if you only take away one thing from this article, make sure that when you come up with your business name, you make sure your name is unique enough that you’re not infringing on anyone’s rights.

Image courtesy: Waag Society