Business
CHOOSING THE BUSINESS ENTITY RIGHT FOR YOU
When starting a new business, several fundamental factors must be considered. The first step is deciding what
ownership structure is appropriate for you.
SOLE PROPRIETORSHIP
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. Also, when the
business is expanding, it may be most advantageous to choose the corporate structure.
CORPORATION
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 manage the business, and employed officers who oversee day-to-day operations. In California, one or more persons may form and operate a corporation. As a separate legal entity, a corporation is capable of continuing indefinitely and 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 Corporation, an Incorporator must file Articles of Incorporation and pay the requisite state fees and any prepaid taxes with the Secretary of State. To maintain a corporation, corporate formalities must be followed. Otherwise, a creditor may”pierce the corporate veil”and shareholders will be personally liable to that creditor.
A non-profit corporation is formed very much the same way as a corporation. However, the incorporator must file forms with the IRS and receive a tax exempt status, such as a 501(c)3. The C-corporate form of business where the liability of its shareholders is limited to their investments. However, 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. However, in most small or closely held corporations, this “double taxation” dilemma will rarely occur.
Some small corporations are able to avoid the double taxation problem by electing to be an “S-Corporation Status” An S-Corporation is taxed only once when profits are distributed to the shareholders-owners. This is known as “pass through” taxation. To qualify for the S election, the corporation must be a domestic corporation, have only one class of stock, and have 75 or fewer individual shareholders who are not nonresident aliens.Some disadvantages of an S-corporation’s is that the taxable income or loss for the current tax year is taken into account pro rata by the shareholders on their individual returns regardless of whether the corporation actually distributes that income to its shareholders. Additionally, S-corporations are limited in terms of the amount of deductions for fringe benefits such as health insurance. Finally, the IRS may terminate an S-corporation status if the corporation claims income from a passive investment over certain limits during a specific time frame.
LIMITED LIABILITY COMPANY
An LLC provides the same protection as does a corporation but has the tax advantages of a partnership.
Members of an LLC declare company income or loss on their individual income tax returns. Also, members are
usually not personally liable for the debts and obligations of the limited liability company but exceptions exist
when members personally guarantee obligations of the LLC. In California, an LLC may be formed with one
member or it may have an unlimited number of members. The members usually own and manage the business
One disadvantage of the LLC is its transferability. No one can become a member of an LLC without the consent
of members having a majority in interest unless the articles of organization provide otherwise.
PROFESSIONAL CORPORATIONS
California does not allow any professional requiring a license to form a LLC. Examples of such professions
include general contractors, doctors, lawyers, real estate agents and certified financial planners. Therefore,
those wishing to start a business in a profession requiring a license are limited to the corporate form,
partnerships or sole proprietorships.
Whether you are an individual or a large company, Macomber Yockey Law can help you identify
the goals and needs of your company and decide on the business entity that would be most appropriate to fit
those needs.
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