Coming up with a business model can seem easy when you realize the sheer amount of business entities to choose from when it comes to business formation. The good news is the attorneys at Loftin | Bedell P.C., are here to help you explore your options and explain the various advantages and disadvantages that come with each type of business entity.
We provide a wide range of business law services and pricing plans to help build a solid foundation for your company. To find out how we can help you achieve your goals, contact us online, or call 866.933.2340 or 760.814.9649. From our Carlsbad offices, we serve business clients from throughout California.
Choosing An Entity That Reflects Your Goals And Needs
We can explain the differences between the various types of business entities and help you decide which one is right for you. We can help with business formation of all types, including:
Limited liability company (LLC): A California LLC helps to protect its owners from personal liability if the company is ever sued. In addition, the entity is automatically taxed as a pass-through entity (partnership), but the entity may elect to be taxed as if it were a regular C-corporation. The structure of LLCs is often less complicated and subject to less regulation than other corporations, which generally makes them easier to manage.
Several items to bear in mind when it comes to LLCs is that they are required to pay an annual minimum California tax of $800 a year, even if the business did not bring in any income for that year. Also, a fair amount of information regarding the company must be disclosed to the state (including the address of the principal office, the name and address of the manager, if applicable, and if member-managed, the name and address of each member), and this information then becomes available to the public.
C-corporation (C-Corp): This is a classic business entity, well-known and well-established under the law. This business form extends personal liability protection to its shareholders who collectively make up the ownership of the corporation. The operation of this type of entity is overseen by a board of directors with day-to-day decision-making left to corporate officers. This type of business entity exists forever, unless steps are taken to dissolve the corporation.
It is important to note that both profits made under this type of structure and any salary or dividends collected by shareholders are subject to taxation. Also, this type of entity is relatively complex, as numerous regulations must be followed, including making annual filings.
S-corporation (S-corp): A S-corp is simply a C-corporation that elected for taxation under Subchapter-S of the Internal Revenue Code. Thus, the S-corp is functionally similar to a C-corp. However, it is considered a pass-through entity in regards to federal income taxes, which means that profits and losses are passed through to the shareholders of the corporation. This taxation pass-through allows the corporation to avoid double-taxation.
The California S-corp is also different from a C-corp in that it is restricted to one class of stock and may have no more than one hundred (100) shareholders.
Nonprofit 501(c)(3) corporations: There are three primary types of nonprofit corporations under California law: (1) public benefit, (2) mutual benefit, and (3) religious. Charitable business organizations are subject to a number of complex state and federal requirements. For nonprofit public benefit corporations, completing a 501(c)(3) application for the IRS is a monumental undertaking in and of itself. By obtaining tax-exempt status, donors to such charitable organizations will typically be able to utilize personal tax deductions for all such donations. To ensure tax-exempt status is preserved, nonprofit corporations should be sure to comply with the bylaws and properly maintain meeting minutes and other corporate actions.
Limited liability partnership (LLP): This structure is fairly similar to a LLC. Partners cannot be held personally liable for negligent acts committed by other partners or employees who are not under their direct control. There is also no personal liability for partnership debt and other business-related obligations.
Currently, this type of structure is limited to certain licensed professionals (e.g., attorneys, accountants, and architects), and any profits you may collect are subject to a self-employment tax. A California LLP may also be subject to other licensing and registration requirements.
Sole proprietorship: This is a business entity that is owned and operated by an individual. A sole proprietor receives all profits and has complete control over the business. Some of the pitfalls of this model include unlimited liability, which means the personal assets of the proprietor can be taken by creditors or the assets may be used to settle a lawsuit brought against the business.
Joint venture: A joint venture involves two business entities that decide to join forces on a particular venture. This allows the parties to pool their resources, share the inherent risks and make use of their strongest assets. These entities are subject to significantly less regulations than their counterparts and are relatively easy to form.
Similar to a sole proprietorship, the biggest risk from forming this type of entity means that you are exposing yourself to unlimited liability to creditors and lawsuit plaintiffs.
Contact Our Business Law Firm
To learn more about the business entities that will best suit your needs, please contact us online. From our San Diego area office, our lawyers represent businesses and entrepreneurs from across the state.