Corporation vs. LLC: Which should I choose for my business

incvsllc01bTHIS COMPARISON of Limited Liability Company (“LLC”) versus Corporations (S or C) is intended to address a typical startup of a small business organization.

Corporation Advantages

♦ May elect a non-calendar fiscal year, providing opportunities for shareholders to accelerate or delay recognition of income (C corporations only).

♦ Is the only limited liability organization that is available to most licensed professionals in California (including dentists and doctors).

♦ May obtain significant tax benefits not available to LLC (S corporation and C corporation have different benefits; see C corporations vs S Corporations for details).

♦ No income tax owed by shareholders of insolvent corporation for “cancellation of debt” (solvent LLC members of insolvent LLCs are generally taxed on the amount of bad debt cancelled).

LLC Advantages

♦ Creditors of members cannot seize membership interests (and thus take some management control to force extra distributions), but can only attach earnings of the member/debtor as previously authorized by the LLC.   [Comparison: Creditors of shareholders, who can attach shares as collateral for security agreements under Article 9 of the Uniform Commercial Code].

♦ Less annual paperwork (no annual minutes required, and no separate LLC tax return required for a one person LLC).

♦ More freedom to creatively arrange differential capital contributions, profit distributions, loss allocations, preferential payments and voting arrangements between owners.

♦ Fewer limitations and burdens on trust ownership of LLC (dangers exist for trust ownership of S corporation).

♦ Loans personally guaranteed by members are added to basis, so if significant losses are anticipated those increased losses may be claimed as an additional tax deduction.

This comparison is not exhaustive, nor does it apply necessarily in each and every circumstance.   The contents of this website are not intended to be, nor shall they be considered, legal advice or legal opinions. Please see your attorney and/or certified public accountant for more thorough coverage of the subject.

This information is not intended to be used nor can it be used for purposes of avoiding tax penalties or promoting, marketing or recommending to another party any transaction or matter addressed above.

Christopher Shenfield, Esq., Burlingame, California, March 20, 2015

C Corporation vs. S Corporation: Which should I choose for my business?

C-Corp

THIS COMPARISON of C corporations vs S corporations is intended to address a typical startup of a small business organization.

C Corporation Advantages

♦ The business wants to use a different fiscal year different than the calendar year – this can delay recognition of income, and eliminate additional costs for short-lived corporations.

♦ The business will show a profit immediately and earn enough to fund desired specialized pre-tax benefit plans such as those listed below (and that must also be paid to these employees) – one person corporations can take full advantage of all these programs:

  • Disability insurance (key people only)
  • Up to $50,000 in life insurance (full time employees)

♦ IRC §105 Medical-dental reimbursement plans (full time employees)

♦ All net income will be paid out as salary (rather than as distributions), avoiding the California S corporation 1.5% tax on annual income over $53,000.

♦ The business will have any non-resident alien shareholder.

S Corporation Advantages

♦ The business may show a net annual loss of over $50,000 per shareholder per year at any point during the first five years.

♦ The business ultimately will be sold for a substantial amount, particularly if the goodwill on sale would be linked to the business name (not personally to the business owner)

♦ The business plans to retain earnings for future business spending.

♦ The shareholders want to reduce payroll taxes by limiting their salaries to a “reasonable” amount and paying the remaining profits out as S corporation distributions (save 13.8% on amounts up to $118,500 in 2015, and 2.3% over that amount, taking into consideration the 1.5% California franchise tax).

♦ The preferred corporate form is not clear, and a future change in corporate status may be desired.

This comparison is not exhaustive, nor does it apply necessarily in each and every circumstance.   The contents of this website are not intended to be, nor shall they be considered, legal advice or legal opinions. Please see your attorney and/or certified public accountant for more thorough coverage of the subject.

This information is not intended to be used nor can it be used for purposes of avoiding tax penalties or promoting, marketing or recommending to another party any transaction or matter addressed above.

Christopher Shenfield, Esq., Burlingame, March 16, 2015

Incorporation of Medical and Dental Practices

sedation-dentist-in-philadelphia-how-anxiety-is-managed-on-the-dental-chair-2At Shenfield & Associates, we represent healthcare professionals, including physicians and dentists, who often need help with incorporation or establishing partnerships, corporate and regulatory compliance, leases, vendor agreements, professional employment and independent contractor agreements, shareholder buy-sell agreements, joint ventures, bringing a new professional into the practice, non-competition clauses for departing professionals, buying and selling professional practices, and leaving or closing the professional practice.   We do all of this work and more to help physicians and dentists maximize the value and security of their practice.

A threshold question for many physicians and dentists is whether they should incorporate their practice.  What are the costs and benefits of forming a medical or dental corporation?  This article addresses these questions.

Benefit – Limited Liability

Limited liability is the primary benefit of incorporating your medical / dental practice. A dentist or physician operating as a solo practitioner is personally liable for all general debts and liabilities of the practice, including vendor contracts and real property and equipment leases.  On the other hand, a shareholder of a medical or dental corporation is not personally liable for the corporation’s debts (except for payroll taxes, workers compensation premiums and related obligations imposed by the government).  There is one big exception, however–physicians and dentists are always liable for their own professional negligence and the negligence of employees under their supervision.  Insurance is designed to deal with this liability.

Benefit – Shielding Partners

Practices with more than one physician / dentist should use a professional corporation.  The professional corporation not only shields each physician / dentist from general liabilities of the corporation (discussed above), but also shields each practitioner from liabilities arising from the acts of other practitioners in the group. Although two or more dentists / physicians can work together as a partnership, this is not your best choice. Partnerships are risky because each physician / dentist is liable for the acts of each other physician / dentist in the practice group. Incorporation deals with this risk by protecting against liability from other practitioners in the group.

Costs – Franchise Taxes & Accounting

Professional medical and dental corporations pay franchise taxes and require legal and accounting costs for their organization and maintenance.    At the time of writing this blog, California imposes annual franchise taxes on professional “S” medical or dental corporations at the greater of $800 or 1.5% of the professional “S” corporation’s annual income.  Moreover, because physicians and dentists are subject to special regulations, they need specialized legal advice to ensure compliance with various licensing, insurance and governmental regulations.  These costs can be higher than for non-professional, non-healthcare corporations.

Benefits and Costs – Taxation

The tax advantages and disadvantages of forming a medical or dental corporation depend on the physician’s / dentist’s circumstances, which change from year to year, as well as changes in tax law.   In California, the current franchise tax for a professional corporation that qualifies for and has elected Subchapter “S” corporation status is the greater of $800 or 1.5% of the “S” corporation’s annual net income.  (Disclaimer:  See Franchise Tax Board’s website for current information. )  Moreover, the minimum franchise tax is required of all medical and dental corporations whether active, inactive, operating at a loss or filing a short-period return (less than 12 months).

This article is a brief discussion of the issues involved in deciding whether or not to incorporate your medical or dental practice. There is a lot more to this topic. Please get competent legal and tax counsel before you form a medical or dental corporation.