LaFlam Sullivan LLP

Description

Choice of Business Entity: Corporate Form vs. LLC When an entrepreneur plans to start a new business, several fundamental factors must be considered. Each of these fundamental factors is essential to the success of a business. However, an appropriate structure is the best first step. Before deciding which ownership structure will be most appropriate for you - a sole proprietorship, a partnership (limited or general), a corporation (C corporation or S corporation) or a limited liability company (LLC) - you must first decide where you want to grow. A sole proprietorship is the simplest of all of these entities, but provides the least amount of protection for its owners. A sole proprietorship may be the most appropriate business form if your business is relatively small, non-diversified, has modest profits, and is not likely to expand significantly in the immediate future. However, even a small business might consider electing S corporation status for advantageous tax treatment. If your business is larger, has greater investment needs but few owners and has a low risk of liability, the most appropriate form may be a partnership. When the business is expanding, becoming more profitable and diversified, it may be most advantageous to choose the corporate structure. If your main concern is limiting your personal liability for business debts, limited liability companies may be the choice. This article focuses on the characteristics; the advantages and disadvantages particularly associated with California corporations and limited liability companies (LLC). The most important feature of a corporation is that it is a separate legal entity from its owners and operators. Corporations consist of shareholders who are the owners of the business, a Board of Directors who are elected by the shareholders to manage the business, and employed officers who are elected by the Board to oversee day-to-day operations. In most states, including California, one or more persons may form and operate a corporation. As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers, or directors or by any transfers of its shares. To form a general C-Corporation, an Incorporator must file Articles of Incorporation and pay the requisite state fees and any prepaid taxes with the Secretary of State. A properly formed C-corporation pays taxes at its own income tax rates and files its own corporate tax forms each year. One of the key advantages of the C-corporate form of business is that the liability of its shareholders is limited to their investments. Their personal estates are usually not liable for the obligations of the corporation. However, corporate formalities required by California must be followed; otherwise, a court or the IRS may “pierce the corporate veil ” and hold shareholders personally liable for corporate debts. A key disadvantage of the C-corporate form is that any distributed corporate income is taxed twice. The corporate entity pays taxes on the corporation ’s income, and when income is distributed to shareholders, the shareholders again pay taxes on that income.

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