LLC vs Corp in California
One of the first and most significant decisions you will need to make when starting a business is choosing a corporate structure. If you plan to incorporate in California, you have several options available to you. Each type of corporate structure has advantages and drawbacks, and the optimal structure for you will depend on the specifics of your business. Continue reading to learn about the difference between an LLC and a Corporation under California law. If you need assistance building your small business or are dealing with a business dispute in Southern California, call a professional and experienced Ventura business law attorney.
LLCs vs. S Corp Generally
Most small business owners in California narrow their choices for business structure down to LLC or a corporation. LLC stands for “limited liability company,” a type of business structure with a structure similar to a partnership. LLCs are designed to have limited liability, like a corporation, but also to be simple to operate and administer, like a partnership.
A corporation is a legal entity separate and distinct from its owners (called “shareholders”). For a California small business, electing treatment as an “S-Corporation” for IRS purposes can provide certain benefits for the small business. Corporations have a variety of requirements for establishment and administration. S Corp status alters the taxation of the corporation from the traditional C Corp style and is available to corporations with fewer than 100 shareholders.
Typically, decisions about the corporate structure for new business owners come down to a few factors, namely: tax consequences; personal liability and protection of personal assets; ease of administration; corporate formalities; ability to allow public stock offerings; and personal preferences of the owners.
Personal Liability
Corporations and LLCs both offer personal liability protection, meaning that the business entity is separate from the individual owners. Unlike partnerships or sole proprietorships, owners of corporations and LLCs keep their business and personal assets separate. For the most part, business liabilities will not reach the individuals, so individual owner assets cannot be attached in lawsuits or debt collection efforts brought against the business.
Tax Consequences
LLCs and S Corps are both “pass-through” entities, which means that profits and losses go directly to the owners and are reported on individual owner tax returns. For LLCs, business income is taxed as employment tax, and LLC owners are considered to be self-employed and pay self-employment tax toward Social Security and Medicare. While S Corps are also pass-through, only the wages of the shareholders are subject to employment tax, which can result in significant tax savings. It should be noted, however, that an LLC can elect to be taxed as an S Corp.
Administrative Formalities and Requirements
Corporations have a variety of specific requirements for formation, reporting, and administering business. Corporations must have bylaws and shareholder meetings, their directors are subject to certain fiscal responsibilities and duties, and they have extensive reporting requirements (including regular tax reports). S Corps also are limited to 100 shareholders.
LLCs have relatively few formal requirements. They only need to file taxes once a year, have fewer administrative requirements, and there is no limit to the number of owners.
Transferring Ownership and Longevity
S Corps and LLCs differ in terms of how easy it is to transfer ownership, and as to what happens when one owner leaves. Corporations are at an advantage: Ownership is measured by shares, which are relatively easy to transfer. If a shareholder dies, sells their shares, or goes through bankruptcy, the corporation lives on.
LLCs are established with certain owners. Transferring ownership is a more complicated process than simply selling shares. Moreover, if an owner dies or goes through bankruptcy, the LLC might be dissolved. If an LLC plans to expand or go public, it would likely need to convert to a corporation.
At the end of the day, there are pros and cons to each structure. The best option will depend on the type of the business, the size of the business, the amount of revenue and owner income, the number of owners, and the preferences of the owners. Talk to a seasoned California business lawyer to discuss your options for corporate structure.
Seasoned Advice and Representation from a Southern California Business Law Attorney
If you are forming a new business or if you need advice or assistance concerning any business matter, contact Rounds & Sutter for sound legal advice and well-considered representation.