If you are involved in business long enough, you’ll hear about “pass-through” companies, and you might wonder what those are. What’s passing through them, and why would you want something to pass through them at all? Put simply, there are certain kinds of companies that will allow you to treat the company’s income as though it were your own income, which has both benefits and drawbacks.
The two most common forms of pass-through companies are limited liability companies (LLCs) and S-Corps. LLCs are a kind of company that’s relatively easy to create, which protects its owners (called “members”) from certain legal and financial liabilities. S-Corps are a kind of corporation you can create which differ from standard “C-Corps” in how they are taxed. However, S-Corps have strict requirements: they cannot be owned by other corporations or LLCs, there must be no more than 100 shareholders, it can only have one class of stock, it can only operate domestically, and all its citizens must be US citizens or permanent legal residents.
Both LLCs and S-Corps have their own requirements for how they must be filed and operated, but the income from both “passes through” to their owners. This means the income is taxed as personal income (as though you made it from working a job) and avoids the “double taxation” of corporate taxes. In practical terms, this can potentially save you a lot in taxes, allowing you to keep a lot more money than you normally would if you were, for example, operating a standard C-Corp.
However, there are downsides to both LLCs and S-Corps. As stated previously, for example, S-Corps must meet several strict requirements, on top of other filing and organizational requirements that every corporation must meet. LLCs also have certain restrictions about how they can operate and selling a membership in an LLC can be difficult, as it requires universal approval from all the other LLC members. Consulting with a business law attorney is crucial to determining what kind of business structure is right for you.
Deciding whether to incorporate your business can be confusing, and you should contact an attorney with knowledge of all areas of business law to help you make the best business decisions for you. The business attorneys at Blodnick, Fazio & Clark have the experience you need to make your business successful. If you want assistance in incorporating your business or forming an LLC, please call our Nassau County business lawyers at (516) 280-7105, or, for our Suffolk County business lawyers, call (631) 669-6300.