Last week I introduced a discussion about structuring a business for food production. That discussion continues here at a very general level, so please consult your legal and tax professionals for advice specific to your needs.
In the long run, I believe deciding on a structure that will work effectively for you from start-up to exit (more on that later) will save you money and reduce the amount of time you need to spend on administrative tasks that take you away from doing what you love: making food! However, it may be that you want a structure that is easy to maintain early and reorganize later depending on how things go. Let’s consider corporations (S-corps and C-corps) and LLCs as possible business structures.
Tax regulations factor into decisions on business structure. A C-corp pays taxes, and its shareholders also pay taxes on the income derived from their ownership in the corporation. An S-corp does not pay taxes; instead its income is passed through to its shareholders, who pay taxes on their personal income from the business. An LLC may elect to be taxed as an S-corp or a partnership. So why would anyone decide to form a C-corp?
Like an S-corp but unlike an LLC, a C-corp can issue stock to attract investors. Unlike an S-corp, a C-corp can issue multiple classes of stock. Like an LLC but unlike an S-corp, a C-corp can have an unlimited number of owners (in the form of shareholders, i.e., owners of stock in the corporation). In addition, those owners may be companies rather than individuals and do not have to be U.S. citizens (not the case with an S-corp).
A unique feature of the C-corp is that its owners can split profits and losses with the corporation to achieve a desired tax rate. However, profits and losses of the corporation itself are not reported on the owners’ personal tax returns as such.
S-corps and C-corps must document the sale of stock to investors at specified prices, and should keep good corporate records by issuing stock certificates and maintaining stock ledgers that accurately evidence the ownership of the corporation. S-corps and C-corps also need to have shareholder agreements in place that govern how distributions are made to the shareholders, among other things. These entities must also hold annual meetings of the shareholders for the conduct of the business. LLCs, on the other hand, have more flexibility in how distributions are made and are not required to hold annual meetings of their members (analogous to shareholders in corporations).
Now for the disclaimer: For more on the tax considerations associated with any of the business structures discussed here, I strongly recommend you consult with a licensed tax attorney or accountant. This article introduces ideas and is not legal advice. You may need to obtain a Federal Employer Identification Number (FEIN) and take other measures to stay compliant.
I will conclude this brief business structure discussion next week with some additional thoughts.
Thank you for reading!
For more information on this topic, please contact Scott Lloyd at firstname.lastname@example.org.
ABOUT SCOTT LLOYD
Scott Lloyd is a registered patent attorney who specializes in intellectual property counseling and commercialization work. He has served as a technology commercialization specialist and advisor to companies in a diverse array of markets, including biotechnology, pharmaceuticals, medical devices, food and beverage, specialty chemicals, technology, and engineering. In addition, Mr. Lloyd spent ten years as in-house general counsel to small and mid-sized companies, where he managed corporate matters and resolved commercial disputes in addition to intellectual property strategy, and now serves in the same capacity for entrepreneurial clients. He serves as counsel to small and mid-sized business owners seeking to implement growth strategies and succession plans.
While in house, Mr. Lloyd has also contributed to the successful formation of international affiliates of domestic businesses as well as a $400,000,000 business acquisition.
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