LLC vs. Corporation for Asset Purchase
LLC vs. Corporation for Asset Purchase
One of the most important decisions an individual can make when purchasing an asset, is which entity is the best one given the totality of the circumstances. It is helpful to decide which entity to use before you purchase a new asset. The Victoria Law Group can help you in your decision making, and we can help you form the entity if necessary.
For example, C Corporations are considered to be great for businesses that indulge in selling products and have lots of employees. However, businesses that are involved in providing services may find alternative structures better suited to their corporate composite.
S Corporations are the perfect choice for people who like the protection and structure of a corporation, but they are limited as to who may own and participate in them.
LLCs on the other hand, prove to be great for the majority of people who want an entity to hold real estate or other kinds of appreciating assets. An LLC poses a flexible tax structure and offers great asset protection.
Here at the Top Questions to consider when evaluating which corporate entity is best for an Asset Purchase.
Top Entity Choice Questions When Considering an Asset Purchase
- 1. What types of assets can be the subject of an Asset Purchase Agreement in the U.S?
- 2. Should I consider buying a rental/investment property in my own name or in a corporate entity?
- 3. Is it better to use a Trust or an LLC to purchase real estate?
- 4. Is it possible to form a single person LLC?
- 5. What is the best time to form a corporate entity?
- 6. What are the post-completion requirements after signing of the Asset Purchase Agreement?
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Differences between a Corporation and a Limited Liability Company (LLC)
A limited liability company is a type of business entity that combines the personal liability protection of a corporation with the tax benefits and simplicity of a partnership. The following section details the main advantages and disadvantages of corporations versus LLCs.
Advantages of a corporation versus a limited liability company (LLC)
Corporation profits are not subject to Social Security and Medicare taxes:
Like a sole proprietorship or a partnership, the salaries and profits of an LLC are subject to self-employment taxes, currently equal to a combined 13.3%, unless the LLC opts to be taxed as a corporation. With a corporation, only salaries (not profits) are subject to such taxes.
Corporations garner greater acceptance:
Although limited liability companies have become more and more popular, they do not have the long history in the United States that corporations do. Not everyone is familiar with them. Although they continue to grow in popularity, still, in some cases, banks or vendors may be reluctant to extend credit to limited liability companies. Also, in Florida, banks generally require the presence of every LLC Member to open a simple operating checking account. Whereas the corporate secretary can generally open a bank account for the corporation. Also, some states restrict the type of business an LLC may conduct.
Corporations can offer a greater variety of fringe benefits with fewer taxes:
Corporations offer a greater variety of fringe benefit plans than any other business entity. Various retirement, stock option and employee stock purchase plans are available only for corporations. Plus, sole proprietors, partners and employees owning more than 2% of an S corporation, for example, must pay taxes on fringe benefits (such as group-term life insurance, medical reimbursement plans, medical insurance premiums and parking). Shareholder-employees of a C corporation do not have to pay taxes on these benefits.
Corporations lower taxes through income shifting
Although C corporations are subject to double taxation, a C corporation can use income shifting to take advantage of lower income tax brackets.
*Example: a company that earns $100,000. With a sole proprietorship, a business owner who is married and filing jointly would be in the 25% income tax bracket. With a corporation, assume that the business owner takes $50,000 in salary and leaves $50,000 in the corporation as corporate profit. The federal corporate tax rate is 15% on the first $50,000. Furthermore, the business owner is now in the 15% tax bracket for his or her personal income tax. This can reduce your overall tax liability by over $8,000.
Advantages of a limited liability company (LLC) versus a corporation
LLCs have fewer corporate formalities
Corporations must hold regular meetings of the board of directors and shareholders and keep written corporate minutes. Members and managers of an LLC need not hold regular meetings, which reduces complications and paperwork.
LLCs have no ownership restrictions
S corporations cannot have more than 100 shareholders. Each shareholder must be an individual who is a U.S. resident or citizen. Also, it is difficult to place shares of an S corporation into a living trust. These restrictions do not apply to LLCs (or C corporations).
LLCs have the ability to deduct operating losses
Members who are active participants in an LLC’s business can deduct operating losses against their regular income to the extent permitted by law. While S corporation shareholders can also deduct operating losses, C corporation shareholders cannot.
LLCs have tax flexibility
By default, LLCs are treated as a “pass-through” entity for tax purposes, much like a sole proprietorship or partnership. However, an LLC can also elect to be treated like a corporation for tax purposes, whether as a C corporation or an S corporation.
Top Entity Choice Questions When Considering an Asset Purchase
In simple terms, It is important to identify what exactly is being purchased as a part of an asset purchase. Assets transferred as part of an Asset Purchase Agreement may include:
- Plant and machinery;
- Real Estate;
- Stock;
- Contracts;
- Premises;
- Know-how; and
- Goodwill.
The major reason why LLCs were created was to limit the threshold of personal liability. Investors consider this fact a big incentive in relation to buying rental/investment properties in an LLC.
LLCs are considered as different types of tax entities. Most of the time, people have it taxed as a “pass-through” entity. This simplifies the way income and capital gains from the US LLC pass to the owner(s) of the entity. Taxes are to be paid the individual(s). Owner(s) undertake all the possible advantages which the LLC has to offer. Recent changes in tax law have adjusted the way pass-through entities will get taxed.
LLCs must keep proper records but in reality, most of the states in the U.S. have minimal requirements for an LLC versus for a corporation. LLCs do not necessarily have to hold annual meetings. Investors in real estate who own multiple properties often find this structure appealing due to the lack of additional paperwork involved.
In order to compare investing your property in a Living Trust or an LLC, it is important to refer to the advantages of both forms. Let’s have a look at how a Living Trust is more beneficial than using your personal name:
- It helps avoid Probate and consequently, minimize estate taxes.
- With a Trust, if there exists a claim by a tenant, they are restricted from going after your personal property or wages to pay off the debts.
- It is very much understood that if a property is under a name of the Trust, then a claimant in litigation can usually claim nothing but your business asset or income.
On the other hand, there are following advantages of an LLC:
- As an owner of a rental property, it is always better for you to speak to your insurance advisor on how to get adequate coverage to lower the liability risks of renting out your property.
- Placing rental property under an LLC will provide the owner(s) with a better tax structure and ease of business.
It is certainly advisable to speak to an experienced Estate planning attorney and a Certified Public Accountant to understand in depth of putting real estate property under a Trust or an LLC.
Yes, it is very much possible to form a single person LLC. A single person LLC has the advantage of separating the LLCs assets and liabilities from the individual owner.
The best time to form a corporate entity is:
- When the company is planning on opening bank accounts in order to deposit revenue/earnings.
- When the company is in the process of hiring employees
- When the company has to get separated from the founder/investor.
- Protection of personal assets has to be done by the company.
There are a few steps the buyer will need to take care of after signing of the Asset Purchase Agreement. They are given as below:
- Payment of “stamp” which are imposed by the States in the U.S. There is no federal stamp tax but there exists state tax in the U.S.
- Assignments and novations of contracts with customers and suppliers.
Administrative matters such as insurance, payroll, and pensions.
*Conclusion
This article is intended purely for informational purposes. Tax laws and corporate laws are subject to change often depending on the orientation of the politicians presently in power. If you have any tax questions, you should consult a qualified U.S. CPA about current tax laws and obligations. If you have any question about which entity is right for you, please do not hesitate to contact us.
