LLC vs S Corp California: Everything You Need to Know
If you have more than one owner, other parties will be designated as shareholders under a corporation or members under an LLC. 3 min read
LLC vs. S Corp California
When considering an LLC vs. S corp in California, the final choice depends on your unique situation, but LLCs are more accessible overall. Further, S corps and LLCs offer different forms of protection for the owner and varying tax advantages.
Ask yourself the following questions before making further decisions:
- How do I make money?
- Who intends to own my company?
- Who is going to manage my company?
- What are my projected net revenues?
- What are my gross revenues?
- How will the profits be divided if there is over one owner?
If you have more than one owner, other parties will be designated as shareholders under a corporation or members under an LLC. If you are contending with multiple owners, ensure that all parties are on the same page to move the company in a straightforward direction.
Often, owners have different objectives and may want the company to go in a direction you don’t agree with. In cases where disputes arise, have an attorney act as an objective source so he or she can work out the best solution for all parties.
Choosing an LLC
Once all disputes are worked out and essential questions are answered, decide which structure is the best route for your company. For example, if you intend to establish a holding company, an LLC may be the best solution.
Overall, an LLC does not require you to file heavy paperwork, and it is the best option if you do not wish to go through extensive red tape. An S corp, on the other hand, is more structured and requires additional paperwork to start and maintain the entity.
S Corp Decision
If you choose S corp as the primary entity, you must do the following to gain maximum liability protection:
- The corporation should record all annual meetings involving directors and shareholders, including any meetings between board directors.
- The entity should file all paperwork as prescribed by California law.
- The company should also have a steady amount of capital reserves.
- Owners should keep an adequate and up-to-date minute book while making certain that all documents are signed by appropriate parties.
- Business and personal funds should not be in the same coffers.
Overall, an S corp must adhere to tougher standards when it comes to shareholder rules. For instance, S corps only permit 100 shareholders. In addition, all members must be U.S. citizens or legal residents, and another corporation cannot own stock in the company. Qualified trusts can become a shareholder, but each beneficiary is regarded as individual shareholder. Regardless of trustee status or direct ownership, all shareholders are subject to family arbitration guidelines.
Internal operations and management structure should be outlined in what is known as an operating agreement (OA). An OA also determines rights and responsibilities of all members involved.
LLCs allow more flexibility, allowing you to have as many members as you wish, while giving you the freedom to tailor your organization the way you see fit. There is no need for recorded meetings, log-keeping or any other formal duties associated with S corps.
Additionally, your LLC may distribute profits accordingly without following corporate guidelines. Regardless of how you disperse funds, make sure all members are aware of the payment system and document other guidelines accordingly.
There are certain drawbacks to LLCs. For example, LLCs are subject to taxation because the IRS considers these entities self-employed organizations. Therefore, LLCs are taxed to support such programs as Social Security and Medicare.
Moreover, you need to choose an appointed representative of your company, known as a registered agent. This is the person who will accept official paperwork on behalf of the company and file annual reports for the LLC. You may appoint yourself as a registered agent or someone in the LLC. Regardless of who you choose, ensure that person has a registered address in California to be considered a registered agent.
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