All too many business owners (including experienced ones) attempt the “do it yourself” method of establishing entities for their new or expanding business operations. Any reasonably intelligent person can go on the California Secretary of State’s website, print and fill out a form, and mail it in with a check. You may now be “incorporated”, but the failure to comply with a large number of corporate formalities may render that corporation useless. Businesses incorporate (or choose another form of business organization) to take advantage of protections and tax savings, but these can easily be lost in an audit or lawsuit if you have not both properly filed your papers and followed the ongoing operating requirements.
Internet incorporation services claim to set up entities for a fraction of what attorneys charge. Are they right for you? Usually not. They only generate forms and boilerplate documents. They cannot offer any legal advice of any kind. They also don't care about what happens to you years after they have taken their fee and filed your papers, yet it is down the road where you learn whether you have done things properly or have made serious mistakes that renders your business entity void.
There are a variety of business organizational types to consider for your business. Each has strengths and weaknesses, and it is only through working with you to understand your goals and needs that the appropriate entity can be determined. Let the experienced attorneys at Bloomfield Law Group, Inc., help you make the right choice and follow through to insure legal compliance and the full measure of protection and benefit.
Limited Partnerships
A limited partnership must be formally established with the office of the Secretary of State (just like a corporation or LLC). It does provide liability protection for the limited partners, but not for the general partners. The problem is that limited partners are prohibited from managing the day to day affairs of the partnership. If they do, they expose themselves to the same liability as a general partner.
Incorporation
Choosing to incorporate your business is an important step, but it must be done right! Merely filing Articles of Incorporation is insufficient to provide your business the liability protection and tax advantages you seek.
For tax purposes, corporations are either “C” corporations or “S” corporations. By default, all newly formed corporations are “C” corporations. “S” corporation status can be elected at the outset of the incorporation, and under limited circumstances, at a later date.
A “C” corporation is a completely separate taxable entity from the shareholders. All profits are retained by the corporation, which pays its own taxes. Traditionally, shareholders in a “C” corporation simply pay themselves a salary so that the corporation has little or no income at the end of the taxable year. Any retained earnings are taxed at the corporate level, and if those profits are later paid out as dividends to shareholders, they are taxed again at the personal level. This is commonly known as “double taxation” and should be avoided at all costs. It is for this very reason that no individual or small group of investors should ever hold real estate in a “C” corporation. When the property appreciates and is sold, the payment of salaries is inappropriate (since the shareholders did no real “work”) and thus double taxation results.
An “S” corporation is commonly called a “pass through” entity. Even though an “S” corporation has its own taxpayer ID number, all profits (and sometimes losses) pass through to the individual shareholders. This can be a huge advantage in startup phases, especially where the shareholder is an active participant and wants to use the startup losses to offset profits or wages on his or her personal return.
Which is right for you? Our firm asks the right questions, and coordinates with your tax professional, to help you select the right corporation for your business.
Limited Liability Companies
Although newer than corporations, LLCs have the same liability protections as a corporation, and usually with far fewer formalities. LLCs can be taxed as a sole-proprietorship (single member or husband and wife in a community property state), or as a partnership (multiple members). Although it is technically possible to tax an LLC as a corporation, we don’t recommend it absent extraordinary circumstances.
An LLC is either “member-managed” (managed by all of its members) or “manager-managed” (managed by one or more designated managers). A manager can, but need not be, a member of that LLC.
What separates LLCs from corporations is the lack of formal hierarchy and meeting requirements. Whereas a corporation has to elect directors, appoint officers, and have annual meetings of shareholders and directors, LLCs have no such requirement. Once established, no formal meetings (or minutes of those meetings) are required.
Is an LLC right for you? Again, it depends. If you simply want to provide additional liability protection without a complicated set of ongoing formalities, LLCs work well. If you need to take advantage of certain tax benefits, a corporation may be best. If you have high gross revenues and low profit margins, and LLC might not work since LLC fees are based on gross revenue and not net profits.
Our firm forms Limited Liability Companies and always includes every aspect of the set up for a low flat fee. Please call us for a free, no-obligation consultation to determine which choice of business entity is right for you.
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