There are a wide variety of entity choices for your business in California. The California LLC is a popular choice, particularly given its flexibility.
California was a bit late in coming around to the idea of letting businesses form an LLC. The first legislation allowing for an LLC was in Wyoming in the late 1970s. California didn’t join the fun until the early 1990s. That being said, California has embraced the business entity and it has become a popular choice for many businesses in the state.
A limited liability company, better known as an “LLC”, is a hybrid entity. To be frank, it provides the best parts of two other business entities. From a liability point of view, it provides protection from personal liability just as a corporation does, but without requiring the owners of the entity to go through the sometimes burdensome formalities of keeping a corporation up and running.
From a tax perspective, the entity takes on the positive aspects of a partnership. As with a partnership, the finances of the entity are passed directly through to the owners of the LLC. This allows the business to avoid the double taxation issue that can arise with corporations. The primary advantage of using an LLC instead of a partnership is the liability protection. As mentioned above, the LLC gives you the protection of a corporation, but the partnership does not.
There are a couple of potential downsides to an LLC. If you intend to take your business public at some point in the future, you cannot do it as an LLC. The primary reason is the LLC entity does not have shares to evidence ownership. As a result, there are no shares to be sold on the stock market!
A second potential issue is the tax situation of the single owner LLC. The IRS taxes such an entity as though the owner is self-employed. This is not that big of a problem, but it can be a surprise of business owners the first time the file taxes.
If you wish to file an LLC, please contact me.
LLC vs S Corp
There is plenty of information on the benefits and detriments of various business entities, but how do they compare to each other? In this article, we look at the LLC vs the S Corp.
LLC vs S Corp
I practice in California, so I am going to tailor this discussion to California business law. If you live in another state, you can use this as a general educational guide, but should consult with an attorney in your area for specific advice. Business law is controlled by state law, and each state has different rules.
The question of an LLC vs S corp often seems an exercise in futility at first since the entities are often touted to be very similar. In truth, they are. Both provide protection from lawsuits and both have pass through tax status. To find the true differences, you have to look into the details. These details can make all the difference.
The first difference between the two has to do with formalities. The LLC is very informal. You need to comply with only a nominal amount of corporate formalities. Furthermore, you don’t have to have payroll. This allows you to take draws when needed, which can help when it comes to cash flow situations. None of this is true for the S corporation. If your revenues are solid, it doesn’t really matter. If they are not, it can make a big difference.
Taxes are the second area where there is a big difference. Both entities are pass through companies. This means the tax situation flows through to the owners where payment is made, which arguably avoids double taxation issues. Ah, but there is one potential big advantage to the S corp over the LLC that can save you serious cash.
An LLC cannot issue dividends, but a corporation can. You do not pay employment taxes on dividends and typically pay a lower tax rate on dividends. To save money on taxes, you can take a “reasonable salary” from an S corporation and then take the rest of the profit as a dividend thus avoiding the employment taxes. This not possible with the LLC, to wit, it is a big advantage.
Given the above, you might think jumping into an S corp is the obvious answer when picking an entity. Yes and no. The flexibility found in an LLC is a huge benefit and something that should not be undervalued. Being able to pull draws when you need to without any complications is often the difference between a small business owner making it or failing.
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