LLC vs Corporation In California: Everything You Need to Know
When starting a business, it is important to find the right legal business structure for a company3 min read
2. Choosing the Right Business Structure
3. Variables to Consider
4. The Formalities
LLC vs. Corporation in California
An LLC vs. corporation in California might be a tricky decision. As the name suggests, an LLC provides limited liability and the ability to enjoy the benefits of pass through taxation. The structure of a corporation in California may be an S corporation or a C corporation.
Choosing the Right Business Structure
When starting a business, it is important to find the right legal business structure for a company. In many cases, business owners decide between two kinds of structures:
• California S Corporation
• California Limited Liability or an LLC
These business entities have specific benefits and drawbacks. They protect assets differently and may have various tax pros and cons. In addition, an S corporation and an LLC may have differing levels of complexity that may affect the daily management of the company.
Although both of these entities are classified as “pass-through” and can limit liability, there are significant differences between them. Various considerations business owners must take into account include ease of operation, profit-sharing, administrative responsibilities, and taxation of employees.
In addition, an essential step is to determine the number of owners (termed “members” in an LLC and “shareholders” in an S corp) the business will have. If there is only one owner, the process and setup is simple. If there are multiple owners, they should focus on distinct areas concerning the business. For instance, one partner may be involved with issues of ownership or what to do with profits made by the company. The other owner may choose to focus on tax issues.
Since these issues may be complicated and involve more than one person, find an attorney to analyze the company and decide on a legal category to help realize your objectives. It is best to consider an S corporation rather than a C corporation, which can result in taxes that are too high or even in paying taxes twice.
It takes time and consideration to select the right category for a company. The owner or owners should ask themselves the following questions:
• Who manages the company?
• How will the company make profits?
• What are the expected gross revenues?
• What net revenues are likely?
• Who is the head of the company?
• How will the money be divided between owners?
Variables to Consider
In addition to asking yourself the above questions, there are other issues to consider, including the purpose of your company. You may want to start a holding company, which deals with real estate, including royalties from property and revenue from rent. A limited liability is best for a holding company. If you are planning to set up an operating company, one that sells merchandise or supplies services, an S corporation structure is ideal.
Paperwork can take a lot of time away from the running of a business. Owners who want do away with extra paperwork may want to consider a limited liability company. S corporations are subject to government rules, which means filling out numerous forms. Attorneys recommend that those who start LLCs should ensure they have complete alter ego limited liability protection, which allows them to keep their names concealed, if needed. It is important to guard your company from liabilities even if you have LLC status.
The LLC structure is often considered to be less strict than an S corporation when it comes to maintenance. For instance, meetings may not be required, but those who run an LLC should still hold meetings and make reports of them to limit liability.
You can protect your company from liability if you choose an S corporation by doing the following:
• Hold regular meetings with shareholders, board of directors, and other relevant people, and give a complete report of topics and decisions that resulted.
• The company should have a healthy amount of working capital.
• It is important to deal with all legal documents promptly.
• The owners should keep a minute book with copies of all documents.
• Keep personal and company funds separate.
To form an S corporation, owners should currently live in the United States and be U.S. citizens. Owners of an S corporation can also be simple trusts. The S corporation had more rules concerning who can be a shareholder. For instance, an S corporation is limited to 100 shareholders, but there probably won’t be more than this number in a small business.
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