Question

Required: You are about to open up a business and you need to determine which entity type you should select for your business. With consideration to the Tax Cuts & Jobs Act of 2017, should you select a single-member LLC as your organization structure or should you become a C-corporation? Would your decision change if the tax reform act did not pass? Administrative: 1. Please provide support for your answer highlighting the advantages and disadvantages of each entity type.

Answer 1

Single-member LLC

Advantages of a single-member LLC include:

• Liability protection: So long as owners protect the corporate veil, they won’t be held accountable for the liabilities of the business.
• Passing on ownership: Because the LLC exists as a separate entity, it’s easy to give ownership to another individual.
• Flexibility with taxation: Owners can elect pass-through taxation (using the personal tax return), or select corporate tax treatment.
• Easy to expand ownership: You can change from a single-member LLC to a multi-member LLC by filing an amendment with your respective state.

Disadvantages of single-member LLCs include:

• Complex formation: You’ll need extensive paperwork to form an LLC, because you’re creating a separate entity.
• Necessary compliance: You’re required to complete various compliance forms to remain in good standing. You’ll also need to make sure you protect the corporate veil to keep your liability protection intact.

C Corporation?                           

C corporations have distinct advantages, such as:

• Limited liability: If corporate formalities are followed, shareholders will not be personally liable for the debts and obligations of the C corporation beyond their initial investment.
• Attracts investors: If you want to have several shareholders or attract outside investment, C corporations are your ideal structure.
• Going public: If going public on a stock exchange is your ultimate exit strategy, a C corporation is your preferred route.

What Are the Downfalls of C Corporations?

On the flipside, here are some disadvantages of C corporations:

• Double taxation: C corporations are subject to double taxation, once at the corporate level and once at the individual shareholder level, making it a heavily taxed entity.
• Strict corporate formalities: Among other requirements, C corporations must have annual directors meetings, annual shareholders meetings, maintain corporate minutes and maintain a separate bank account.
• Costly and tedious to set up: You have to file forms with your state and shell over a few hundred dollars to get started.