Frequently Asked Questions We encounter

Here are the cliff notes on the differences between a Corp contractor's license and an LLC contractor's license.

The main difference is the bonding and insurance requirements.

I'm often asked what the difference is between a corporation contractor's license and an LLC contractor's license.  All license entity types, with the exception of an LLC license, require only the $15,000 license surety bond.  You don't need to have general liability insurance for a sole owner/partnership/corporation license, but it is highly recommended and a good business practice.

The LLC license requires the same $15,000 license surety bond plus a  $100,000 worker surety bond and a $1,000,000 general liability policy.

The 15k bond and the general liability policy are easy to get and are very affordable.  The 100k bond is still easy to get but is not as affordable. Prices range between $1250 to $5000 a year approximately.

After a corporation has been formed, it may elect "S-Corporation  Status" by adopting an appropriate resolution and completing and submitting a form to the Internal Revenue Service (some states require their own version). Once this filing is complete, the corporation is taxed like a partnership or sole proprietorship rather than a corporation. Thus, the income is "passed through" to the shareholders for purposes of computing tax returns.

Most new small corporations elect S-Corporation Status (90%+) so profits and losses can be added to the shareholder’s personal tax returns without having to pay taxes on profits once, then again when they are given back to the shareholders as income (dividends). This is known as "double taxation" and is the reason why S-Corporations were created. An S-Corporation can also revert back to regular Corporation status reasonably easily.

There are some limitations on S-Corporations: they cannot deduct some expenses like health insurance, travel, entertainment, etc., that typical corporations can. Also, they are restricted to 100 shareholders or fewer, and those shareholders must be U.S. Citizens. Finally,  S-Corporations may not own or be owned by other business entities.

PROS: Prestige of the corporation without double taxation. Ideal for "1 person corporations".

CONS: More expensive to set up than a DBA; more paperwork and formality required than an LLC (holding Shareholder/Board meetings,  keeping minutes and resolutions).

The Lowdown: Though taxed in a similar manner to LLCs, it still requires the corporate formalities of a regular corporation (holding Board meetings, keeping minutes and resolutions). 

Benefits of the S-Corporation:

• The main benefit is that profits are not taxed twice as with  C-Corporations. This means that if you are the sole shareholder and you earn $100,000/year and pay yourself a reasonable salary of $40,000, the remaining $60,000 is not subject to a) the Corporate Income Tax  (currently at 15% up to $50,000 in profits, with rates ranging from 25-39% above $50,000) and b) FICA taxes (Social Security, Medicare, and  Medicaid taxes that applies to salary). The profits would be added to your personal tax return and taxed at your personal rate.

There are some restrictions on S-Corporations that you should consider:

• S-Corporations cannot deduct certain items that regular  "C-Corporations" can, like healthcare and travel. Ask your tax advisor for specifics.
• Are restricted to 100 shareholders or fewer, and those shareholders must be U.S. Citizens. Note that spouses are treated as a single shareholder, as are family members in most cases.
• Are restricted to one class of stock (e.g., no Class A, Class B, or preferred shares, just Common shares).
• S-Corporations cannot own or be owned by other business entities (corporations, LLCs, trusts, etc.)

Probate Avoidance: When your membership interest in a limited liability company (LLC) is transferred to a trust that you have created, it will not be subject to probate and this will allow for a much smoother transition after you pass away. The time and money your loved ones will save avoiding probate is an additional benefit of your LLC being owned by a trust.

Privacy: The probate process is entirely public. During these proceedings, confidential business information can be made public, as well as, information that can damage your business's reputation.

Incapacity Planning: Equally important to note is that holding your LLC in trust can not only be a benefit when you pass away but also when you become incapacitated due to injury or illness. With your wishes for the management of your LLC spelled out in the trust, you can be confident that operations will continue if you become temporarily unable to run the company for any reason.

A revocable living trust is one that can be changed or modified after it has been established and while you are alive. Consequently, an irrevocable trust is one that cannot be changed or modified after it has been established.

With your LLC owned by a revocable living trust, you will enjoy probate avoidance, retain access and control over the LLC, and can receive income from it during your lifetime. However, because you still have access to the LLC, so will your creditors.

This means a successful judgment or lawsuit can allow your creditors to reach into the revocable living trust and seize your membership in the LLC to satisfy a debt. For this reason, an LLC or any other asset that you wish to protect from lawsuits and creditor’s claims is better served by being transferred to an irrevocable trust that cannot be accessed to satisfy a lawsuit or judgment.

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