YOUR GUAM LAWYER

Legal counsel can advise upon and prepare a variety of business entities depending upon the needs and goals of the client.  While most of the issues are operational matters, there are times that organizational decisions are made upon immigration, investment and tax considerations.  Guam law provides for corporations, partnerships, sole proprietorships, Limited Liability Corporations, and Limited Liability Partnerships.  Our incorporation services may include the preparation of Articles and Bylaws, First Meeting Minutes, Registration and application for Corporate Charter from the Department of Revenue and Taxation, Subchapter S election, federal Employer Identification Number application and acquisition of a corporate kit that contains the corporate seal, stock certificates, stock register and binder.  Fees and costs vary.    

LLC vs S Corp: Advantages and Disadvantages

An LLC is not a separate tax entity like a corporation; it is what the IRS  and the tax authorities of Guam call a “pass through entity”, like a partnership or sole proprietorship. All of the profits and losses of the LLC pass through the business to the LLC owners who report this information on their personal tax returns. The LLC itself does not pay federal [or the mirror Guam] income taxes, but some states do charge the LLC itself a tax. Consider the following and take advantage of the LLCs and S Corporations that will be most beneficial to your business.

The LLC is a relatively new type of hybrid business structure that is now permissible in most states and the Territory of Guam.

It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.

The owners are members and the duration of the LLC is usually determined when the organization papers are filed. The time limit can thereafter be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.

S Corporation: There are strict requirements and limitations associated with the Subchapter S election of a corporation.  When a corporation is initially formed, it stands as a C-corporation in the eyes of a tax authority {the Government of Guam Department of Revenue and Taxation is the equivalent of the Internal Revenue Service, but only for Guam – IRS still has jurisdiction in Guam for certain taxes}.  Once formed and/or at certain points thereafter, the shareholders of a C-corporation may have the option to become a Subchapter S corporation.  The decision and application to become an S-corporation is called an election.  To qualify, generally, the corporation must have a maximum of 75 shareholders who are individuals. Once a corporation makes the Subchapter S election to be an S-Corporation, profits and losses are passed through the corporation and are reported on the individual tax returns of the respective shareholders of the S-Corporation.

This is the same basic "pass-through" treatment afforded partnerships and LLCs. The key distinction of the S-Corporation is that profits and losses are not taxed at the corporate/business level like they would be if the corporation remained as a C Corporation.

An LLC is not a separate tax entity like a corporation; it is what the IRS calls a pass through entity, like a partnership or sole proprietorship. All of the profits and losses of the LLC pass through the business to the LLC owners , who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, but some states do charge the LLC itself a tax.

An S-Corporation follows the same state formalities as does a C-corporation. However, an S-Corporation must make a special tax election under

Advantages of a Limited Liability Company

• Limited Liability: Owners of an LLC have the limited liability protection of a corporation.
• Flexible Profit Distribution: Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC's have much more flexibility.
• No Minutes: Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate.
• Flow Through Taxation: All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying corporate tax and individual tax. Usually, this will be a tax advantage, but circumstances can favor a corporate tax structure. Consult your CPA or tax advisor for specific advice. 

Disadvantages of Limited Liability Company

• Limited Life: Corporations can live forever, whereas an LLC is dissolved when a member dies or undergoes bankruptcy.
• Going Public: Business owners with plans to take their company public, or issuing employee shares in the future, may be best served by choosing a corporate business structure.
• Added Complexity: Running a sole-proprietorship or partnership will have less paperwork and complexity. An LLC may federally be classified as a sole-proprietorship, partnership, or corporation for tax purposes. Classification can be selected or a default may apply.

Subchapter S Corp

A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass thru directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay herself wages, and it must meet standards of "reasonable compensation". This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.

Advantages of the S Corporation:

• The independent life of the corporation makes possible its continuation and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more shareholders.
• Fractional ownership shares are easily accommodated in the initial offering of stock.
• The purchase, sale and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.
• The requirement that the corporation's finances and records be separate from the finances and records of stockholders reduces the risk of unrecognized equity liquidations.
• With few exceptions, under the Subchapter S election for taxation as a partnership the S corporation pays no income taxes and corporation income or loss is passed through directly to the stockholders.
• To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.
• The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication within the stockholder group (often a close or family group) and can provide more comprehensive guidance for management.
• Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit and the ability to secure needed resources may be improved.
• Earnings representing "return on investment" (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business.

Disadvantages of the S Corporation:

• Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.
• Conflicts or disagreements among the stockholders may immobilize decision making.
• Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.
• Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not active in the business and they may become a voting block that does not support needs and decisions believed desirable by managing stockholders.
• Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.
• Employment benefits such as life insurance, health insurance, and housing costs are taxable income to stockholder employees with 2 percent or more stock ownership and to employees who are directly related to persons owning 2 percent or more of the corporation stock.
• Each shareholder in a S-corporation will be charged his proportionate share of profit and become personally liable therefore to the tax authorities regardless of whether she actually received payment from the company – this arises when the company operates with tight cashflow that is deployed for inventory, equipment or other capital intensive requirements leaving an insufficient amount of cash to actually pay to the shareholders.

• If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.

Federal Tax Forms for Subchapter S Corporations – Guam is equivalent

• Form 1120S: Income Tax Return for S Corporation
• 1120S K-1: Shareholder's Share of Income, Credit, Deductions
• Form 4625 Depreciation
• Form 1040: Individual Income Tax Return
• Schedule E: Supplemental Income and Loss
• Schedule SE: Self-Employment Tax
• Form 1040-ES: Estimated Tax for Individuals
• sub-chapter S of the Internal Revenue Code by filing IRS Form 2553.

Guam is a unique place to engage in business, but requires promoters to research and learn the regulatory requirements before instituting any business operation.  Whether it be service, sales or manufacturing, the Government of Guam has programs that encourage and assist entreprenuers.  The Department of Revenue and Taxation hosts a website that contains useful information for business people.  The University of Guam has a business incubator and the US Small Business Administration offers information, mentoring and other assistance to startups and ongoing entities.