Investment Law
Content
Kathleen C. Galano
Atty. Mary Ann L. Reyes
Investment Law
March 6, 2016
Discuss and Compare the following terms of tax treatment, ease of setting up, legal treatment,
business benefits among others (under American law).
a) Sole Proprietorship
This business structure is the most common and simplest structure chosen to start
a business. In this type of business, the owner and worker are the same person. It does not
have a separate personality and is not a separate entity therefore the owner is entitled to
all the profits and is responsible for all your business’s debts, losses and liabilities.
Sole Proprietor Taxes
Since this type of structure does not possess a separate personality, the business
itself is not taxed separately-the sole proprietorship income is the owner’s income. The
business owner reports the income or losses on his or her individual income tax return
and are taxed at the applicable individual tax rates.
Forming a Sole Proprietorship
In forming a sole proprietorship, decide first on a business name. Thereafter,
register your business and obtain the necessary licenses and permits.
Benefits of a Sole Proprietorship
> Easy and inexpensive to start: A sole proprietorship is the simplest and least
expensive business structure to establish. There are minimal costs at times limited to
obtaining the necessary license or permits.
> Simple to run: Since you are the sole owner of the business, you have complete
control over all decisions.
> Easy tax preparation. The business is not taxed separately. This is basically you
income tax. There is also no double taxation on profits.
> Transferability. The business can be sold easily.
b) Limited Liability Company
A limited liability company is a business structure which combines the limited
liability features of a corporation and the tax efficiencies and operational flexibility of a
partnership or sole proprietorship. In this type of business structure, the members of the
company cannot be held personally liable for the debts and liabilities of the company.
The "owners" of an LLC are referred to as "members" and depending on the state,
the members can consist of a single individual (one owner), two or more individuals,
corporations or other LLCs.
In this type of business structure, there is no need to file a corporate tax return
because unlike shareholders in a corporation, LLCs are not taxed as a separate business
entity. All profits and losses are "passed through" the business to each member of the
LLC. Owners/LLC members report their share of the profits and losses on their
individual tax returns similar to owners of partnerships or sole proprietorships would.
LLC Taxes
Since LLC is not considered taxed as a separate tax entity, the business itself is
not taxed. The profits and losses are passed on to the LLC's members and are paid
through their personal income tax.
Forming an LLC
In forming an LLC, one must first choose a business name, reserve and register
it. Three (3) rules must be followed in choosing a business name for an LLC: (1) it must
be unique; (2) it must indicate that it's an LLC (such as "LLC" or Limited Company")
and (3) it must not include words restricted by your state (such as "bank" and
"insurance"). Next, draft and file the Articles of Incorporation with the Secretary of State.
Once the business is registered, obtain the necessary business licenses and
permits.
In some states, including Arizona and New York, the extra step of publishing a
statement in the local newspaper about the LLC formation is required.
Benefits of an LLC
> Limited Liability. Owners/members are protected from personal liability for business
decisions or actions of the LLC. The members are only liable to the extent of their
investment. When the company incurs a debit or is sued, the personal assets of the
members are usually exempt.
> Simplicity. There is greater ease in setting up and running an LLC versus a
corporation. Setting up a corporation maybe more costly.
> Flexibility in income Distribution. In this type of business structure, there is greater
flexibility in the sharing of profits. Members may determine or distribute profits as they
see fit. This is unlike in a corporation where the share in the profit depends on one’s share
of stock. Members might contribute different proportions of capital and thereafter decide
themselves what percentage of the profits or losses one gets.
c) S Corporation
The IRS defined an S corporation as corporations that elect to pass corporate income,
losses, deductions and credits through their shareholders for federal tax purposes. This is a
special type of corporation created through an IRS tax election which allows a domestic
corporation to avoid double taxation on the corporate income.
In order to qualify for the S corporation status, the company must be a domestic
corporation with allowable shareholders (individuals, certain trusts, and estates) of not
more than 100, have only one class of stock and is not considered an ineligible corporation.
According to the IRS, S corporations are "considered by law to be a unique entity,
separate and apart from those who own it." What makes the S corp different from a
traditional corporation (C corp) is that profits and losses pass through the
owner’s/shareholders individual tax return. Consequently, only the shareholders are taxed
and not the business itself therefor eliminating double taxation.
S Corporation Taxes
S Corporations are required to file tax returns once a year versus a C Corporation
which must file tax returns quarterly. Like partnerships, S Corporations are pass through
entities since no federal income tax are levied at the corporate level. Instead, an S
Corporation profit is allocated to its shareholder(s) and taxed at the shareholder level.
Forming an S Corporation
In forming an S Corporation, one must choose a business name and reserve it.
Thereafter, the Articles of Incorporation must be drafted and filed with the Secretary of
State. After being corporation, all shareholders must sign and file Form 2553 to elect that
the corporation become an S Corporation.
Once the business is registered, obtain the necessary business licenses and permits.
Benefits of a S Corporation
> Limited Liability/Asset Protection. There is limited liability enjoyed by the
shareholders. In this type of business structure, the personal property of the shareholders
are exempt from the claims of creditors.
> Pass-through taxation. Since the S corporation is a pass-through entity, the business
income are passed through the owners, rather than being taxed on a corporate level. This
avoids, double taxation.
> Salary and Dividend Payments. A S corporation can give both salary and dividend
payments which results to a lower tax bill since dividends are not subject to selfemployment tax.
> Ease of Conversion. This type of business structure can be easily converted to a C
corporation more easily than an LLC.
d) Corporation (C Corporation)
A C corporation, also called a regular corporation is a business structure which
has an independent legal personality distinct from its shareholders. This makes the
corporation itself, not the shareholders themselves legally liable for the actions and debts
the business incurs. When the corporation is sued, the shareholders shall only be liable to
the extent of their investment. By virtue of this separate personality, they are viewed as a
separate taxpayer from the shareholder thereby resulting to double taxation.
In comparison to other business structures, these types of corporations are more
complex and tend to be more costly. However, the flexibility it offers in obtaining capital
makes it an attractive type of business structure.
Forming a Corporation
In forming a corporation, one must adhere to the laws of the state where it is to be
incorporated and registered. Thereafter, one must choose a business name, reserve and
register it. Generally, although this would depend on the state of registration, corporations
must include a corporate designation (Corporation, Incorporated, Limited) in the business
name.
Draft the articles of incorporation and file the same with the Secretary of State.
Some states would require corporations to identify their directors and to issue stock
certificates to initial shareholders in the registration process.
Once registered, the necessary business licenses and permits must be obtained.
C Corporation Taxes
A C Corporation is taxes separately from its shareholder which results in double
taxation. Additionally, C Corporations pay income tax on their profits unlike sole
proprietors and partnerships.
Benefits of a C Corporation
> Limited Liability. Shareholders are only held accountable to the extent of their stock
investment in the company. Should the company incur debt or an action is filed against
the corporation, the shareholders’ personal assets are protected.
> Flexibility in Generating Capital. In this type of business structure, it is easier to raise
capital since C Corporations have the ability to raise funds through the sale of stock.
> Continuance of Existence. Corporations may continue its existence despite the
transfer of stock or death of a stock holder.
Sources
https://www.sba.gov/category/navigation-structure/starting-managing-business/startingbusiness/choose-your-business-stru
http://definitions.uslegal.com/s/sole-proprietorship/
http://smallbusiness.findlaw.com/incorporation-and-legal-structures/checklist-starting-asole-proprietorship.html
http://www.investopedia.com/terms/l/llc.asp
https://www.incorporate.com/limited_liability_company.html
http://definitions.uslegal.com/l/limited-liability-companies/
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations
https://www.incorporate.com/s_corporation.html
http://www.obliviousinvestor.com/s-corporation-tax-introduction/
https://ct.wolterskluwer.com/resource-center/articles/s-corporations-offer-advantagesand-disadvantages
http://www.businessdictionary.com/article/37/what-is-a-c-corporation/
https://www.incorporate.com/c_corporation.html
http://www.inc.com/encyclopedia/c-corporation.html
Atty. Mary Ann L. Reyes
Investment Law
March 6, 2016
Discuss and Compare the following terms of tax treatment, ease of setting up, legal treatment,
business benefits among others (under American law).
a) Sole Proprietorship
This business structure is the most common and simplest structure chosen to start
a business. In this type of business, the owner and worker are the same person. It does not
have a separate personality and is not a separate entity therefore the owner is entitled to
all the profits and is responsible for all your business’s debts, losses and liabilities.
Sole Proprietor Taxes
Since this type of structure does not possess a separate personality, the business
itself is not taxed separately-the sole proprietorship income is the owner’s income. The
business owner reports the income or losses on his or her individual income tax return
and are taxed at the applicable individual tax rates.
Forming a Sole Proprietorship
In forming a sole proprietorship, decide first on a business name. Thereafter,
register your business and obtain the necessary licenses and permits.
Benefits of a Sole Proprietorship
> Easy and inexpensive to start: A sole proprietorship is the simplest and least
expensive business structure to establish. There are minimal costs at times limited to
obtaining the necessary license or permits.
> Simple to run: Since you are the sole owner of the business, you have complete
control over all decisions.
> Easy tax preparation. The business is not taxed separately. This is basically you
income tax. There is also no double taxation on profits.
> Transferability. The business can be sold easily.
b) Limited Liability Company
A limited liability company is a business structure which combines the limited
liability features of a corporation and the tax efficiencies and operational flexibility of a
partnership or sole proprietorship. In this type of business structure, the members of the
company cannot be held personally liable for the debts and liabilities of the company.
The "owners" of an LLC are referred to as "members" and depending on the state,
the members can consist of a single individual (one owner), two or more individuals,
corporations or other LLCs.
In this type of business structure, there is no need to file a corporate tax return
because unlike shareholders in a corporation, LLCs are not taxed as a separate business
entity. All profits and losses are "passed through" the business to each member of the
LLC. Owners/LLC members report their share of the profits and losses on their
individual tax returns similar to owners of partnerships or sole proprietorships would.
LLC Taxes
Since LLC is not considered taxed as a separate tax entity, the business itself is
not taxed. The profits and losses are passed on to the LLC's members and are paid
through their personal income tax.
Forming an LLC
In forming an LLC, one must first choose a business name, reserve and register
it. Three (3) rules must be followed in choosing a business name for an LLC: (1) it must
be unique; (2) it must indicate that it's an LLC (such as "LLC" or Limited Company")
and (3) it must not include words restricted by your state (such as "bank" and
"insurance"). Next, draft and file the Articles of Incorporation with the Secretary of State.
Once the business is registered, obtain the necessary business licenses and
permits.
In some states, including Arizona and New York, the extra step of publishing a
statement in the local newspaper about the LLC formation is required.
Benefits of an LLC
> Limited Liability. Owners/members are protected from personal liability for business
decisions or actions of the LLC. The members are only liable to the extent of their
investment. When the company incurs a debit or is sued, the personal assets of the
members are usually exempt.
> Simplicity. There is greater ease in setting up and running an LLC versus a
corporation. Setting up a corporation maybe more costly.
> Flexibility in income Distribution. In this type of business structure, there is greater
flexibility in the sharing of profits. Members may determine or distribute profits as they
see fit. This is unlike in a corporation where the share in the profit depends on one’s share
of stock. Members might contribute different proportions of capital and thereafter decide
themselves what percentage of the profits or losses one gets.
c) S Corporation
The IRS defined an S corporation as corporations that elect to pass corporate income,
losses, deductions and credits through their shareholders for federal tax purposes. This is a
special type of corporation created through an IRS tax election which allows a domestic
corporation to avoid double taxation on the corporate income.
In order to qualify for the S corporation status, the company must be a domestic
corporation with allowable shareholders (individuals, certain trusts, and estates) of not
more than 100, have only one class of stock and is not considered an ineligible corporation.
According to the IRS, S corporations are "considered by law to be a unique entity,
separate and apart from those who own it." What makes the S corp different from a
traditional corporation (C corp) is that profits and losses pass through the
owner’s/shareholders individual tax return. Consequently, only the shareholders are taxed
and not the business itself therefor eliminating double taxation.
S Corporation Taxes
S Corporations are required to file tax returns once a year versus a C Corporation
which must file tax returns quarterly. Like partnerships, S Corporations are pass through
entities since no federal income tax are levied at the corporate level. Instead, an S
Corporation profit is allocated to its shareholder(s) and taxed at the shareholder level.
Forming an S Corporation
In forming an S Corporation, one must choose a business name and reserve it.
Thereafter, the Articles of Incorporation must be drafted and filed with the Secretary of
State. After being corporation, all shareholders must sign and file Form 2553 to elect that
the corporation become an S Corporation.
Once the business is registered, obtain the necessary business licenses and permits.
Benefits of a S Corporation
> Limited Liability/Asset Protection. There is limited liability enjoyed by the
shareholders. In this type of business structure, the personal property of the shareholders
are exempt from the claims of creditors.
> Pass-through taxation. Since the S corporation is a pass-through entity, the business
income are passed through the owners, rather than being taxed on a corporate level. This
avoids, double taxation.
> Salary and Dividend Payments. A S corporation can give both salary and dividend
payments which results to a lower tax bill since dividends are not subject to selfemployment tax.
> Ease of Conversion. This type of business structure can be easily converted to a C
corporation more easily than an LLC.
d) Corporation (C Corporation)
A C corporation, also called a regular corporation is a business structure which
has an independent legal personality distinct from its shareholders. This makes the
corporation itself, not the shareholders themselves legally liable for the actions and debts
the business incurs. When the corporation is sued, the shareholders shall only be liable to
the extent of their investment. By virtue of this separate personality, they are viewed as a
separate taxpayer from the shareholder thereby resulting to double taxation.
In comparison to other business structures, these types of corporations are more
complex and tend to be more costly. However, the flexibility it offers in obtaining capital
makes it an attractive type of business structure.
Forming a Corporation
In forming a corporation, one must adhere to the laws of the state where it is to be
incorporated and registered. Thereafter, one must choose a business name, reserve and
register it. Generally, although this would depend on the state of registration, corporations
must include a corporate designation (Corporation, Incorporated, Limited) in the business
name.
Draft the articles of incorporation and file the same with the Secretary of State.
Some states would require corporations to identify their directors and to issue stock
certificates to initial shareholders in the registration process.
Once registered, the necessary business licenses and permits must be obtained.
C Corporation Taxes
A C Corporation is taxes separately from its shareholder which results in double
taxation. Additionally, C Corporations pay income tax on their profits unlike sole
proprietors and partnerships.
Benefits of a C Corporation
> Limited Liability. Shareholders are only held accountable to the extent of their stock
investment in the company. Should the company incur debt or an action is filed against
the corporation, the shareholders’ personal assets are protected.
> Flexibility in Generating Capital. In this type of business structure, it is easier to raise
capital since C Corporations have the ability to raise funds through the sale of stock.
> Continuance of Existence. Corporations may continue its existence despite the
transfer of stock or death of a stock holder.
Sources
https://www.sba.gov/category/navigation-structure/starting-managing-business/startingbusiness/choose-your-business-stru
http://definitions.uslegal.com/s/sole-proprietorship/
http://smallbusiness.findlaw.com/incorporation-and-legal-structures/checklist-starting-asole-proprietorship.html
http://www.investopedia.com/terms/l/llc.asp
https://www.incorporate.com/limited_liability_company.html
http://definitions.uslegal.com/l/limited-liability-companies/
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations
https://www.incorporate.com/s_corporation.html
http://www.obliviousinvestor.com/s-corporation-tax-introduction/
https://ct.wolterskluwer.com/resource-center/articles/s-corporations-offer-advantagesand-disadvantages
http://www.businessdictionary.com/article/37/what-is-a-c-corporation/
https://www.incorporate.com/c_corporation.html
http://www.inc.com/encyclopedia/c-corporation.html
