Congratulations on your decision to start a new company. Starting a new business may seem daunting but it can be incredibly rewarding to see your company succeed. One of the most important steps you can take is to decide how to establish your company. You may want to operate as a corporation or limited liability company (LLC). Both systems have benefits and drawbacks, which are necessary for you to understand in order to start your business off right.
Corporations and LLCs are formed in California by filing the appropriate documents with the Secretary of State. The state has a number of forms that meet the minimum statutory requirements; however, your business may benefit from composing your own statutorily compliant documents. This includes Articles of Incorporation for a corporation and Articles of Organization for an LLC.
In California, many businesses choose to form their company as an S Corporation or a C Corporation. These corporations are taxed under Subchapters S or C of the federal tax code, respectively. One of the benefits of a corporate structure is the protection it offers shareholders from liabilities of the corporation.
Under S corporation tax treatment, profits and losses of the company flow through to the shareholders. C corporations are taxed as separate entities through filing a corporate tax return. Profits may be taxed twice, once by the corporation and again as personal income on dividends.
Corporations do have to maintain certain formalities that an LLC may not. This includes drafting corporate bylaws, maintaining minutes, annual meetings, issuing stock, and maintaining proper documentation to keep the corporate assets separate from those of the shareholder. S corporations may have additional restrictions to limit the group and class of shareholders.
Limited Liability Companies
In general, an LLC is simpler to establish and maintain than a corporation, does not issue stock, and is not required to hold annual meetings. While an LLC only requires a verbal operating agreement, it is strongly encouraged that owners establish a formal, written operating agreement. Reducing the owners' agreement to writing may prevent unnecessary litigation in the future.
A limited liability company combines elements of a partnership with the structure of a corporation. Owners can treat the company as a partnership and manage their own company in addition to enjoying the protections of limited liability. Owners are generally protected from individual liability for debts of the LLC.
For tax purposes, an LLC is classified as a partnership if it has more than one owner. An LLC with one owner may be taxed as a sole proprietorship or division of the single owner. However, an LLC may also choose to be taxed as a corporation.
Not all companies or businesses may be able to choose between an LLC and a corporation. Certain professional services, including legal and medical services, may have different state licensing requirements. Talk to your business attorney before deciding whether to establish your company as a corporation or LLC. They can help to ensure your company starts off on the right foot.
If you have any questions about establishing a new business or require general business counseling, contact Butterfield Schechter LLP. With a focus in employee benefit legal services, business and transactional counseling, and tax law, our firm has the unique ability to help you establish a custom plan that conforms with regulatory requirements and represents your best interests. Contact our office today with any questions on how we can help you and your business succeed.