When considering forming an LLC vs. Corporation California, there are many similarities and differences; consider both the benefits and disadvantages of tax implications, ease of operation, requirements of the administration, the sharing of profits, and liability protection.

S Corporation vs. LLC

Selecting the right business structure for a new company can be a challenge for small business owners and entrepreneurs. One important decision that California business owners must make is the selection of the legal entity they will handle their business through-either a Limited Liability Company or an S corporation. Many business owners reduce their decision to a California LLC also called a Limited Liability Company or a California S corporation or S corp. 

Both business types protect the assets of the business owner, providing differing levels of:

  • Tax advantages and disadvantages
  • Protection of personal assets
  • Intricate daily operations

Before understanding the tax significance between a corporation and an LLC, it's important to grasp the differences between an S corporation, C corporation, and LLC. 

When considering these different options, a business owner should consider the implications of their choice on: 

  • Taxes
  • Ease of operation
  • Administration requirements

Important Considerations When Choosing a Business Entity

When making your decision between an LLC and an S corp, it's effective to focus on three particular areas of key importance to business owners:

  • Personal liability to the owners from business-associated liabilities are limited and the necessary formalities that come along with the maintenance of limited liability are limited as well. 
  • Taxes which could potentially be associated with your business are limited.
  • Any special circumstance considered important to principals or applies to a factual circumstance. 

It's key to first establish the number of owners or shareholders of the new entity you're forming-owners are called shareholders in an S Corp and members in an LLC. Determining the number of owners before establishing the business is very important; it is a straightforward process with one owner. 

An Overview of the S Corporation

1. S Corp - Limit Liability by Paying Respect to Corporate Formalities

Regarding incorporation, the problem is that clients have been misled too often by low-cost online services which promote "self-help" and only achieve the basic task of obtaining Articles of Incorporation from the Secretary of State without any follow-up documentation afterward-these follow through formalities are required according to California law.

2. S Corp - Tax Considerations

Generally, an Corporations.shtml">S corporation is not subject to federal income tax. The corporation divides its losses and income across the shareholders in proportion to how much ownership interest the shareholder has. The shareholders are required to report the losses and income on their own personal income tax returns; this is why the entity is referred to as a “flow-through”.

3. S Corp - More Considerations

Requirements to be Eligible for the S Corporation Status. 

It is required for the corporation to stick to stringent rules regarding shareholders in order to be eligible for an S corp status. 

All shareholders must be a: 

  • U.S. citizen 
  • Legal U.S. resident 
  • Qualified type of trust   
  • Qualified estate

Corporations cannot be shareholders within an S corporation and the amount of permitted shareholders is limited to 100. Shareholders who are related are treated as an individual shareholder following rules on family attribution. The evidence of owning an S corporation are stock certificates issued to individual owners at the formation of the corporation.

An Overview of the Limited Liability Company 

1. Limited Liability Corporation - Moderate Formalities as Compared to an S Corporation

It's a requirement for owners to file the Articles of Organization rather than Articles of Incorporation to form a California LLC and agree on important business points that will be outlined in the Operating Agreement, then file the Statement of Information with the Secretary of State in California in addition to other requirements beyond this text.

2. LLC - Considerations for Taxes

For the sake of federal income tax, a Limited Liability Company is treated as a flow-through entity. In the case of only one owner, the LLC is still treated as a flow-through entity and the owner reports losses and profits on Schedule C of their own personal tax return.

3. Limited Liability Corporation - More Considerations

Administration and Control

California Limited Liability Corporations or LLCs have more flexibility than an S corporation in regard to control and management issues. The management of an LLC lies with the managers in a manager-managed LLC or with the members in a member-managed LLC; compare this to the dIrector, officer, and shareholder roles of an S corporation.

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