Are you a business owner that is looking to have your company be its own legal business structure for limited personal liability, among other reasons? The most popular types of limited liability business entities are LLCs and Corporations.
Types of Business Entities
There is a variety of business entities that a business can be filed as in the state of California. Each type has its own advantages and disadvantages, depending on what the company’s owner(s) are seeking in terms of liability and taxes.
LLC
A limited liability company, LLC, is a private limited company. It is a business structure that is taxed similarly to a partnership or sole proprietorship but has the limited personal liability of a corporation. LLCs can limit the liability of members.
Corporations
A corporation is a separate business entity from the owners. The advantage of a corporation is there is increased credibility for the business, limited liability, easy transfer of ownership and sometimes that results in the ability to raise capital more easily. Corporations are most commonly referred to as C or S Corporations. That refers to their tax classification.
S Corp
A S Corporation is a tax election that a corporation makes that passes corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. The corporation is not taxed separately. The corporation will still pay employment tax on its employee’s wages. It is most often used by small business owners.
C Corp
A C Corporation is a corporation that is taxed separately from its shareholders. Many times it is referred to as a double taxation corporation because the corporation has its own tax rate for income and the corporation also pays employment tax.
Non-Profit Corporation
A nonprofit corporation is a corporation formed to carry out a charitable, educational, religious, literary, or scientific purpose.
What The Conversion Process Entails
If you are interested in turning your sole proprietorship or general partnership into a different business entity type there is a process that you must follow in order for the business to become its own legal business structure. This will separate the business from the individuals that own it both financially and with regard to liability.
Unlike a sole proprietorship, an LLC or Corporation can provide its members or shareholders with limited liability since the business is a separate entity. This is extremely important if the company was to face financial obstacles and any debts. It is important to note that just because you have set up an LLC or Corporation that doesn’t guarantee liability protection. The business must be set up properly and maintained in order for the members or shareholders to have protection.
Regarding taxes, in some situations as an LLC or Corporation, the members or shareholders can benefit from not being taxed personally on the business’ profits since it is a separate entity. It is important to know though that LLCs and Corporations are required to pay some additional expenses such as filing their own tax return and a franchise tax in California there is an $800 minimum franchise tax on LLCs and Corporations regardless of earnings.
A.L. Harvey Law is happy to assist you in determining the correct business entity type for your business and helping you convert your existing business into its own entity. Contact us today for more information.
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