Masonry Magazine November 2004 Page. 41
Sub S Corporations
Sub S corporations are preferable and are commonly used by small businesses with few individual owners. Thus all profits and losses of the business are passed to the owners and there is no corporate level of taxation. Once again, this seems like a perfect remedy, but like anything business-related there are a few catches.
There are several restrictions on Sub S corporations, including the number of owners, the types of owners (generally requiring U.S. citizenship), and the ability to invest in other entities.
Sub S corporations are preferable and are commonly used by small businesses with few individual owners; however, because of some of these issues, certain businesses continue to use a partnership to operate the business to take advantage of certain tax savings. As we discussed earlier, the big risk of running a business through a partnership is that it offers no protection to the individual partners whose personal property and assets remain at risk. Enter the LLC!
Limited Liability Company
The limited liability company (LLC) is a relatively new business entity and has become the preferred choice for operating most businesses in the last decade, including those in the construction industry.
What is a LLC, and why is it so attractive to business owners? Simply stated, it offers the best of both worlds. That is, it provides the same protection from personal liability as a corporation and provides all the tax benefits of a partnership. Like a corporation, the LLC is a separate legal entity, and its assets are owned separate and apart from the personal assets of the owners, called members.
A limited liability company is created by filing Articles of Organization, similar to Articles of Incorporation for a corporation. The governing document for a LLC is its operating agreement. An operating agreement is a cross between the bylaws of a corporation and the partnership agreement of a partnership. What also is attractive about the LLC for owners, especially those who are not holed up in an office all day, is that state laws do not require the same types of formalities as a corporation. There is no requirement for the members to meet annually or to keep formal minutes, and many states do not even require an annual filing fee. So we don't need to go any further now that the LLC solves all our problems, right? Well, maybe...
There are a few reasons why the LLC might not be advantageous. This includes certain situations where the company owns and transfers certain types of real estate or if the company intends to be publicly traded some day. Changing an entity from a limited liability company to a corporation generally will not create a tax liability; however, changing from a corporation to a limited liability company could result in a significant tax obligation. That is why it is so important to do it right the first time.
What's an Owner to Do?
Totally confused? I hope not. The best advice for the construction industry is that the LLC is probably the most effective and safest business entity; however, it is worth a few hours of professional advice from your accountant and lawyer at the outset to review the exact business being formed and the plans for its growth. It is also important to determine how the business will be continued but we'll save that discussion for another bowl of soup!
John J. Matteo, Esq., is a Director with the Washington, D.C., law firm of Jackson & Campbell, P.C. He chairs the Business Law Practice Group and specializes in business and commercial real estate matters. He may be reached at jmatteo@jackscamp.com.
This article is not intended to provide specific legal advice, but instead is a general commentary regarding legal matters. You should consult with an attorney regarding your legal issues as the advice you may receive will depend upon your facts and the laws of your jurisdiction.
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November 2004
Masonry 39