1. Business Structures
Operating your business as a corporation or limited liability company is a great way to limit your personal liability for business debts and other business related liabilities. When these structures are employed in conjunction with adequate liability insurance, assuming you dont guarantee debts or engage in intentional wrongdoing, your personal financial exposure should be greatly eliminated.
A. Corporations.
A corporation is a legal entity, separate and distinct from its owners. A corporation can transact business in its own name just like an individual. A corporation is controlled by a board of directors, who are elected by the owners/stockholders. The directors, in turn, elect officers to manage the day-to-day operations of the company. In California, a single person can incorporate, being the sole stockholder, director and required officers.
In order to insure that the owners of the corporation remain protected from liability, they must observe corporate formalities. They must keep adequate books and records, they must hold board and stockholders meetings and they must keep minutes of those meetings. Further, the corporation should be managed as an independent business, meaning the owners shouldnt be living in company owned homes, driving company owned vehicles, all the while the company pays their personal expenses.
One disadvantage of the traditional corporation is its tax structure. Typically corporations are taxed once on their profits, then the stockholders are taxed again when those profits are paid out as dividends. This is known as double taxation. Small companies generally avoid this by electing S-Corporation status with the IRS. This allows the profits to pass through to the owners and be taxed at their individual rates. This is typically how LLCs are taxed.
B. Limited Liability Companies
The limited liability company (LLC) is a relatively new business structure. Formation and operation of such entities in California was authorized in 1994 through the Beverly-Killea Limited Liability Company Act. Since 2000, single individuals have been allowed to set up LLCs.
Some call the LLC a blend of the best characteristics of corporations, partnerships and sole proprietorships. While it is a separate legal entity like a corporation, the owner or owners can usually elect to be taxed as a corporation, partnership or the same as a sole proprietor, whichever is most beneficial. Moreover, unlike the corporations, there are no requirements to hold annual meetings, elections, make resolutions and keep minutes.
2. Which structure is best?
In the final analysis, the answer to this question generally depends which structure has the greatest tax advantages to you, in light of your business, future plans, expectations and personal finances. Unfortunately, we are neither tax attorneys nor accounts and therefore do not give tax advice. Accordingly, we highly recommend you consult with a tax professional before making a decision.
3. Do you need an attorney to set up a corporation or LLC?
No, but we highly recommend it. The problem with doing it yourself is that if its done wrong, you wont know it until its too late. Paying a few hundred dollars to make sure your organization is structured right is cheap insurance when compared to the possibility of unlimited financial exposure or tax problems. Dont be tempted by the many low cost ads for incorporation services. Most of these companies simply file a few preliminary forms then send you a pile of fill-in-the-blank forms to complete and submit.
4. How much do we charge to set up an Corporation or LLC?
In most instances we charge a flat rate fee of $1,200.00, which includes approximately $200.00 in State fees and other costs. The foregoing charges do not include the $800.00 a year minimum corporate or limited liability company tax due the State of California Franchise Tax Board (you should note that most ads for the do-it-yourself kits never mention this tax and usually you wont hear about until after youve paid their fee).
If youre considering setting up a corporation or LLC please call or come in for a free consultation so we can go into greater detail about what is involved and what we can do for you.