3.4 LLCs

CHAPTER 3

• Self-employment tax savings: A C corporation can off er selfemployment tax savings.17

Articles of Incorporation (sometimes called a Certifi cate of Incorporation) must be fi led with the state and the necessary fi ling fees paid to register a VRP business as a C corporation.18 When they are formed, C corporations are required to adopt bylaws, hold an initial meeting of directors and shareholders, and issue shares of stock to owners.

With three steps, starting a C corporation with any online business fi ling site is easy. I suggest you meet with an experienced attorney and/or accountant to complete this step for your business. And remember, your VRP is a business.

3.4 LLCs

There is another business entity type that is formed under state law and provides personal liability protection: an LLC, which stands for Limited Liability Company. An LLC gives its owners (who are called members) greater fl exibility than a corporation in deciding how it will be managed and how fi nancial interests will be split. An LLC is similar to an S corporation in terms of taxes because it is a pass-through entity. The business income and expenses of the LLC are reported on the personal tax return of its member(s).

If you are the only member of an LLC, you will report your LLC’s income and expenses on Schedule C of Form 1040. This is the same schedule used by sole proprietors. If there is more than one member, the LLC is taxed like a partnership. An LLC can also choose to be taxed like a C corporation by fi ling a form with the IRS. If it qualifi es, it could also be taxed like an S corporation.

17. https://ct.wolterskluwer.com/resource-center/articles/c-corporations-off er-advantagesand-disadvantages Accessed June 27, 2019. 18. https://www.bizfi lings.com/toolkit/research-topics/incorporating-your-business/whatare-aricles-of-incorporation Accessed May 16, 2019.

WEALTH AS A VACATION

Tax Differences Between an LLC and a Corporation Although LLCs and S corporations are both considered pass-through entities for federal income tax purposes, they are not taxed identically for all purposes. For example, they are aff ected diff erently when it comes to employment taxes. The main thing to note here is tax laws are complex and change frequently. Consulting with a trusted tax advisor will be necessary regardless of which business structure you choose for your VRP operation. We will return to this topic in Chapter 7.

To form an LLC, Articles of Organization must be fi led with the state and the applicable fi ling fees paid. LLCs must fi le annual reports and pay applicable annual report fees.

LLC Advantages An LLC provides limited liability protection to its owners as owners are not personally responsible for business debts and liabilities of the limited liability company. As a result, creditors cannot pursue owners’ personal assets to pay business debts. Here are a few more advantages to consider:

• Pass-through taxation: Income and losses are reported on the owners’ personal tax returns. • Flexibility in allocating profi ts among owners: LLCs off er owners fl exibility in allocating profi ts and losses among various owners. • No ownership restrictions: LLC ownership is not limited to a certain number of owners the way an S corporation is. LLCs typically have no or very few ownership restrictions imposed. • Flexible management: Limited liability VRP company owners have fl exibility in structuring company management. • Fewer ongoing formalities: LLCs have less annual paperwork than C corporations and S corporations. They do not face the meeting requirements of corporations, either.