The information below is designed to answer some frequently asked questions about forming a business in Louisiana. Please be forewarned that this is general information which may not apply to your situation, depending on the particular facts and circumstances. The information below is not meant to constitute legal advice; always consult a competent legal advisor to obtain advice pertinent to your specific problem.
1. I want to open a business. What are my options?
The easiest form of business is a sole proprietorship, which consists of one owner. To operate under a trade name, it is prudent to protect the trade name by filing an application with the Louisiana Secretary of State and the Trademark office in Washington, D.C. An affidavit of assumed name must also be filed in the Clerk of Court’s office in the parish in which the business is located. A sole proprietorship is not a separate legal entity. It is merely part of the owner’s own assets and liabilities.
A corporation is a separate legal entity. The corporation issues shares of stock in exchange for cash or property or services rendered. The shareholders select a board of directors, who manage the affairs of the corporation. The directors elect officers of the company who serve at the discretion of the board of directors. A corporation is formed by filing Articles of Incorporation and an Initial Report with the Louisiana Secretary of State.
A Limited Liability Company is similar to a sole proprietorship if it has only one member. If there are multiple members it can be organized as a partnership or corporation. It is owned by its members who share in the profits and losses of the LLC in accordance with their agreed-upon percentages. The members may elect to manage the company or may elect one or more managers to manage the company on their behalf. A LLC is formed by filing Articles of Organization and an Initial Report with the Louisiana Secretary of State.
2. Am I liable for the debts of the company?
The owner of a sole proprietorship is liable for all of its debts because it is not a separate legal entity. The shareholders of a corporation and members of a LLC are not liable for its debts unless they have taken dividends or distributions from the company at a time when it was insolvent. In addition, a shareholder can be liable for the corporation’s debts if the formalities regarding the corporation’s existence are not met. For example, if the shareholder fails to maintain minutes of the shareholders or board of directors’ meetings, pays personal expenses with the corporation’s funds, loans money freely to and from the corporation, and otherwise fails to respect the corporation’s existence as a separate legal entity, the protection of limited liability may be pierced by a creditor who does not get paid by the corporation.
3. How are these entities taxed?
A sole proprietor reports the income and expenses of the business on his personal income tax return.
A corporation files its own income tax return. It pays tax at a flat rate of 21%. However, if a closely-held corporation accumulates earnings and fails to distribute its earnings to its shareholders as a dividend, an additional penalty tax may apply.
A single member LLC is a disregarded entity for tax purposes. Its activity is reported on the member’s personal income tax return. A two or more member LLC files its own income tax return, but its income and expenses flow through proportionately to its members based upon their profit and loss sharing ratios for the year. The members pay tax on the LLC’s net income, whether this income is distributed to the members or not. If the income is distributed in later years, the members do not pay another tax on the distribution.
4. I have heard that corporations are subject to a double tax; could you explain?
A regular corporation pays tax on its own net income. When the shareholders want to collect that net income, they can do so by paying themselves a dividend on their shares or by liquidating the corporation. If they pay a dividend, the corporation cannot deduct the payment, yet the shareholder has to report the dividend as part of his income. If they choose to liquidate the corporation, the shareholders have to pay a capital gains tax based upon the difference between what they put up for their stock and what they receive in the liquidation. In both events, there could be a double tax.
5. Is there a way of avoiding a double tax for a corporation?
The corporation can elect to be treated as an S corporation. An S corporation does not pay tax on its own income. Rather, its income and expenses are reported proportionately by the shareholders on their personal income tax returns in the percentage of their interest in the common stock of the corporation. An S election must be made within the first seventy-five days of the corporation’s existence. S elections which are made after the corporation has been in existence for some time will trigger a tax in the event the corporation sells assets with a built-in tax profit within five to ten years of the date of the S election. It is preferable to be an S corporation from the beginning of the corporation’s existence.
6. Are there any other advantages or disadvantages to these entities?
A proprietorship and a LLC pay no state franchise tax. Corporations must pay the franchise tax for the privilege of doing business in Louisiana. Franchise tax is based upon the company’s debt and equity. The tax is $450 on the first $300,000 of taxable debt and equity and an additional $3.00 for each $1,000 over and above $300,000.
A regular corporation can cover its owners in an IRC Section 125 cafeteria plan. An S corporation and a LLC cannot cover its self-employed owners.
Members in an LLC take withdrawals of the LLC’s profits without having to file payroll tax returns. Shareholders of corporations who render services must comply with all payroll reporting requirements, which can increase the cost of doing business.
For most small businesses, the LLC is the preferred form of business entity.
We hope that this information will be useful to you as you embark upon your new business venture. We will be happy to answer specific questions in a personal and confidential meeting. Please call our offices to schedule an appointment with Ray Ladouceur,985-898-2131.