I am working with a client who has a percentage ownership in an LLC, however, the company is in the process of being bought out by a C-Corp. If this happens, is it good for him? Bad for him? Should the LLC stay in place because of the advantages it possesses? Or is a C-Corp better? We will analyze the advantages of an LLC vs. a C-Corp and decide what is best for our client.
· Taxes: LLC’s are taxed at the federal level as “pass through” taxation which means profits or losses are passed on to the individual member(s) level rather than at the corporate level.
· LLC’s are not allowed to issue shares, but they can have multiple owners who all own a share of the company.
· LLC does not have any restrictions on who can own the company, unlike an S-Corporation.
· C-Corp are referred to as being “double taxed.” This means that the C Corporation is responsible for paying federal income taxes on the profits and then owners and employees of the C-Corp are also required to pay taxes on the individual level.
· C-Corporations allow for as many shareholders as they want. There are no limitations as to who can have shares in the company. Moreover, there are no restrictions on what shares can be offered (common stock vs. preferred stock).
· They allow for foreign investors, whereas an S-Corporation only allows for U.S. investors
What is better? The answer lies in what you think is best for the direction of your company moving forward. There is no generic answer that says which formation structure is the best. It all stems from how big, or small, you want your company to be. As companies get larger, they tend to move towards the C-Corp structure because of the additional advantages afforded to them. Only you can decide what tax benefits that you think are the best.
Regarding our client, his question deals with what could happen with his ownership if it changes from the LLC to C-Corp. We want to make sure that his percentage ownership of the LLC stays consistent if it moves to the C-Corp and his shares do not become diluted.
Dilution means that when a company issues new stock, it results in the decrease of the current stockholder’s percentage of ownership within that company. For example: if a company has 100 shares and 5 people own 20 shares each, then those five individuals own twenty (20) percent of the company. If, however, the new company issues 100 new shares of stock and investor A buys all of the 100 newly created shares, then the original owners now own 20 out of the 200 shares or ten (10) percent of the company thereby diluting their ownership in the company.
We want our clients to have all the information so that we, as a team, can make the best decision moving forward for them.
If you have any business law questions, or law questions in general, please contact us at (214) 890-4066 or visit our website at http://www.dfwlaborlaw.com