The Law Offices of Attorney Timothy J. Pavone, PLLC: Where an Attorney Can Create an LLC and S-Corporation to Protect Your Business Assets and Limit Your Taxable Income

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Limited Liability Company (LLC)

How do we make it?

The Secretary of State’s office of North Carolina, must approve of your LLC application to create this special company and costs a $125 filing fee. The filing fee for a foreign LLC is $250. Your application doesn’t have to, but should have an operating agreement.

What are the rules of an LLC?

In exchange of limited liability protection, the state of North Carolina created and coded a set of rules your LLC must follow. These are known as the default rules and you can find them in their entirety in Chapter 57D of the North Carolina Limited Liability Act. However, although this is the rule-book, you can create your own rule-book and supersede Chapter 57. This means you can stack the deck and give yourself any rules you want your company to have. Remember though, notwithstanding this ability, there are certain principles that an LLC must follow in order to continue to get the limited liability protection.

How does it work?

Let’s say you have a business, Bob’s Boutique. It does not matter if you are the only employee or if you have 100 employees (can have up to 100 employees with an LLC). There is nothing different about how you conduct your business but the difference is the state of North Carolina will give you a special shield of armor if you become Bob’s Boutique LLC rather than just Bob’s Boutique.

So, if you have just a sole proprietorship and not the special LLC classification, your business has no shield or armor from third parties. If you do have an LLC, the state of North Carolina armors your business with a special protection from third parties that you are liable to. This means, if you are liable to a third party, they cannot recover your business assets as you are shielded from liability. This does not mean that you are not liable to a third party from other assets you might have. However, it does mean that your business profits are not touchable.

Therefore, let’s say Bob puts in $50,000 into Bob’s Boutique. If Bob ends up incurring $75,000 in debt from a lawsuit or creditors, he is only liable for $25,000. In law terms, this is considered being unable to 'pierce the corporate veil'. To further illustrate this idea, let’s say that Party A has an order for judgment against Party B for $1,000,000. When Party A goes to collect the judgment, he finds out that Party B has $100,000 in their pockets, and $900,000 of business profits. How much does Party A recover? Party A only recovers $100,000 and not the business profits. This is the main reason why we create an LLC.

What is an operating agreement?

An operating agreement is your playbook. It gives you the ability to not follow the default rules, and create your own. Of course, it should be obvious that you want to be able to make your own rules, and not follow someone else’s. A good operating agreement, can make your LLC even more shielded from third parties and lets you make the rules. An operating agreement also gives you the chance to lay out how you want your business ran.

S Corporation

Why do it?

If you have an LLC, or are thinking about creating one, the IRS automatically taxes single member LLC’s as sole proprietorships and multi-member LLC’s as partnerships. However, you can have your LLC taxed as an S-Corp as well. Even if you have an LLC, you can change your taxation into an S-Corp. The main reason to choose this entity, is to save money from Medicare, Social Security, and/or self-employment taxes.

If you do choose an S-Corporation, you are now an employee of your LLC. It does not matter if you are the only person in your LLC, you will still be considered an employee. Why someone would want to do this is because if you are an employee, you need to pay yourself a salary. If you have a salary, it is considered a business expense.

This means when you are ready to file your taxes, as an S-Corp, you will only pay taxes on your salary and not all profits like an LLC. Here’s how it works: Business A, an LLC, has to report all income. Business A made $75,000 income. This means you are taxed at $75K, including your social security tax and Medicare tax.

Business B who is an LLC and taxed as an S-Corp also made $75,000 income. However, they paid themselves a reasonable salary of $45,000. This means when they report their $75,000 income, you and your business will only pay Social Security and Medicare taxes on your $45,000 salary not the $75,000 total income. Get it?

Why The Law Offices of Attorney Timothy J. Pavone
should make you an LLC?

The Law Offices of Timothy J. Pavone will help you understand the rules of Chapter 57. Although, you can make your own rules in the operating agreement, there still is certain principles you cannot break as an LLC owner. You need to know what these are. Moreover, having an attorney draft an operating agreement for you, is a VERY good idea. You have the LLC, let the attorney make sure you have the most favorable rules for your situation. The Law Offices of Attorney Timothy J. Pavone will create an operating agreement for you.

If you are ever sued, all the rules will be written in your favor for your company and the members within it. Depending on if you are the only business owner, or you have partners additional members or operators, makes a difference when setting up an operating agreement.