The business entity you choose during formation will impact the future of your business. This choice determines how you will file taxes, how profits and income will impact your tax payments, to what extent you will be personally liable for your business, and more. Let’s take a moment to go over each of your options and what benefits they offer, so that you can start making a decision now.
Tax Tip: For tax and liability purposes, there is no distinction between the business and yourself. All profits, losses, and liabilities are your own.
A Sole Proprietorship is the simplest business form you can choose. As a Sole Proprietor, you get more control, spend less up-front, and have an easy path to filing taxes correctly. This is not a legal entity, but an unincorporated business owned by an individual.
Formation is easy as a Sole Proprietor. This business status can be given as soon as you begin doing business in California. Because of this, it is crucial that you get the required licensing, based on your state and industry needs, as soon as possible. (The Small Business Association has a great business licensing & permits tool that can get you started.) If you are operating under a business name that is not your given name, it is also important to register your Doing Business As (DBA) name with the state.
Tax Tip: A partnership itself is not liable for income tax, but does pay an annual minimum franchise tax of $800 in California.
A Partnership is useful when two or more persons want to share in profits, business contributions, financial responsibility, and liability. Partnerships are common for medical, legal, and other professional services practices, because they offer the ability to add new partners, who take on shared responsibility.
Formation involves a partnership agreement, registering with your state, choosing a name, and filing for the required licenses in your state. Formation is easy and inexpensive, compared to more complex business entities. For more information on how to file as a Partnership in California, visit the Franchise Tax Board’s website.
Limited Liability Company
Tax Tip: All profits or losses “pass through” an LLC to the owners’ personal income tax returns, and profits can still be subject to self-employed taxes.
One major reason to use an LLC is that it takes liability off of you personally, unlike a Partnership or Sole Proprietorship. In the case of a lawsuit or other problem, your personal assets will most likely be exempt. This adds a level of protection to your business and personal assets, in addition, an LLC also has simpler record-keeping requirements than corporations.
An LLC’s owners, called members, earn income and are taxed as if they were self-employed. Members can be individuals, corporations, other LLCs, and foreign entities.
The LLC formation process involves choosing a business name, obtaining licenses and permits, filing your articles of organization, and following state guidelines for hiring employees.
Corporation / C Corporation
Tax Tip: A Corporation is taxed separately from its owners and shareholders. This means that shareholders are only taxed on their income from wages, bonuses, and dividends. The result is a 2-level tax.
A Corporation, or C Corporation, is an independent legal entity owned by its shareholders. The benefit here is that not only do shareholders not take on liability, as with an LLC but that corporations are separate entities that can gain capital and file their own taxes. Corporations are also able to give employees appealing benefits and stock options.
Formation is filed through the state and requires articles of incorporation. If the corporation is doing business in California, you must also file form 100. To learn more about whether the business you conduct is considered “doing business in California” by the state, visit the franchise tax board’s website.
S Corporation / S Corp
Tax Tip: An S Corporation is a corporation that elects to pass income and losses to shareholders through earned income or as distributions. In some cases, this can avoid double taxation and offer greater tax flexibility.
An S Corporation comes with many of the perks of a C Corporation, but the business itself is not taxed. S Corps allow business expense write-offs for taxation purposes and can remain intact when shareholders leave the company, but the individual owners report the corporation’s income on their federal tax returns.
Corporate Formation: Formation requires that you first register as a C Corporation. Then, all shareholders must sign a form electing your corporation to become an S Corp. If you are unsure whether you will qualify, or you want to learn more about the formation process take a look at the IRS S Corporation guidelines.
LLC & S Corp Status: It is also possible to elect S Corp status for taxation purposes for your LLC. This would bring your LLC many of the benefits of an S Corporation, giving you greater flexibility in how you are taxed.
This is just a brief overview of the different business entity options, but it requires careful planning to choose the best option for your business. Mendes Weed, LLP will strategize and determine the best entity to suit your needs.
Are you ready to take the next step in your business entity filing? Mendes Weed, LLP is ready to work with you to pursue your best interests. Give us a call today.
California Tax Law Specialist
Partner Christina Weed has years of experience helping businesses and individuals with their complex California tax litigation issues. She is a licensed attorney with an LL.M. in Taxation from the University of San Diego and a Bachelor’s Degree in Accountancy. She serves as Chair of the Tax Section of the Contra Costa County Bar Association and is also a member of the Estate Planning Council Diablo Valley and the Tri-Valley Estate Planning Council.
In 2018, Christina became one of the first lawyers to argue a case in front of California’s Office of Tax Appeals.
Christina has been designated a Certified Specialist in Taxation by the State Bar of California.
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