When you’re starting a business in California, one of the first decisions you’ll need to make is what form it will take. Two of the most common types are LLCs and corporations, and understanding the differences between the two can help you decide which structure will work best for you.
An Overview of Limited Liability Companies (LLCs)
LLCs are a flexible business structure, which makes them the entity of choice for family-based companies and closely-held businesses. Unlike corporations, they don’t require a Board of Directors, and members can decide how to distribute the ownership stake. They can also be owned by nonresident aliens, unlike an S-corporation
The primary drawback to an LLC is that unless the operating agreement specifies otherwise, it must be dissolved if a member leaves.
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- Asset Protection: As long as your personal assets are kept separate from those of the LLC, they are generally immune to creditor claims. Although single-member LLCs can run into challenges in this area, an experienced business attorney can advise you on how to ensure personal asset protection.
- Filing Requirements: California LLCs must file an initial report with the state within six months of incorporating. After that, additional statements are due every two years by the end of the anniversary month of the filing of the articles of organization.
- Taxation: You and the other members can decide how you want the company to be taxed. By default, the IRS will treat it like a sole proprietorship (if you are the only member) or a partnership. In California, LLCs pay an annual tax of $800 to the Franchise Tax Board, and if you have elected to be treated like a corporation for tax purposes, a franchise tax is imposed on all business transacted in the state.
- Management Structure: LLCs have a comparatively flexible management structure. You can decide to have it managed by its members or be “manager-managed,” meaning that all members relinquish authority to a named manager.
An Overview of Corporations
There are two types of corporations: S-corporations and C-corporations, with the latter being more traditional. This business entity can have a high number of shareholders, which is important if you plan to eventually go public. Corporations also exist in perpetuity, meaning that they continue to exist even when an owner leaves.
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- Asset Protection: Corporations protect shareholder assets from being seized to satisfy company debts, provided that the operators observe corporate formalities that maintain the business as a separate entity.
- Filing Requirements: Corporations have more exacting filing requirements than any other business structure. In addition to filing Articles of Incorporation, you must hold shareholder meetings and meetings of the Board of Directors at least once a year and file an annual report to keep the business’ information current with the Secretary of State.
- Taxation: C-corporations are taxed separately from their shareholders. They have their own tax filing requirements and taxation rate. S-corporations are “pass-through” entities, meaning that each shareholder reports income on their personal tax returns. This avoids the double taxation issue frequently encountered by C-corp shareholders, who must pay tax on their non-deductible dividends.
- Management Structure: Corporations require a formal structure with a Board of Directors handling the management responsibilities and corporate officers taking care of the day-to-day operations of the business. Although shareholders remain separate from business decisions and operations, they can elect directors, and individual shareholders can be appointed as an officer or elected as a director.
Contact a Sacramento Business Law Attorney
Both LLC and corporations have their own benefits, and deciding which entity aligns the most with your business objectives is an important first step to take on the way to forming your company. At the Law Offices of Tyler Q. Dahl, we will help you determine which entity is right for your business on the basis of your goals, the proposed structure, and your plans for the future. To schedule a consultation, please contact us today.
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