COMPANY C
A corporation is a legal entity owned by its shareholders (owners). Since it is a separate entity from its shareholders, its owners are protected from personal liability for the debts and obligations of the corporation. C Corporation is the most common form. C Corp is taxed under the Internal Revenue Code, Section A, Chapter 1, Section C, unless it elects to be taxed under Section S. C Corps is subject to double taxation: first, C Corp itself is taxed annually on its income; and second, shareholders are taxed when they receive this income as dividends. A California C Corp. is taxed on its net income at a rate of 8.84 percent; it is also subject to a minimum annual franchise tax of $800. The estimated annual tax must be paid in four installments.
C Corp. must comply with certain formalities so as not to lose the status and protection of the company. For example, must make regulations governing shareholder meetings, determine the scope of authority of the board of directors, etc.
Advantages:
– Generally, there is no personal responsibility.
– Ownership can be transferred easily through share sale.
– The corporation survives the death of the owner.
– Owners can issue and sell shares to investors to raise capital.
Counter:
– More expensive to set up and maintain than a sole proprietorship or partnership.
– Possibility of double taxation.
– Ongoing filing and reporting requirements.
S COMPANY
An S Corp is an ordinary corporation or any business entity, (i.e. a partnership or LLC that elects to be taxed as a corporation), that elects to be taxed under Subsection S of the federal tax code. S Corp is not taxed at the entity level, and profits flow directly to owners. California S Corp. is taxed on its net income at a rate of 1.5 percent. The estimated annual tax must be paid in four installments.
Advantages:
– Avoid double taxation.
– Generally, there is no personal responsibility.
– Generally, survive the death of the owner.
Counter:
– Must not have more than one stock class.
– Ongoing filing and reporting requirements.
– Maximum one hundred shareholders.
LIMITED COMPANY (LLC)
An LLC combines the favorable tax treatment of a partnership with the company’s shield from personal liability. The LLC owner’s liability for the LLC’s debts and obligations is limited to their financial investments, but members have the right to participate in the management of the company like general partners.
In California, for income tax purposes, an LLC with more than one member is taxed as a partnership, and an LLC with one individual member is taxed as a sole proprietorship. An LLC can elect to be taxed as a corporation by filing an election on Form 8832 with the IRS. California taxes LLCs and their owners in the same way that the IRS does, in addition to a minimum annual tax of $800 for the privilege of doing business in the state. LLC’s, whether Californian or foreign, may not provide professional services.
Advantages:
– Easier and faster to form than corporations.
– Generally, there is no personal responsibility.
– No double taxation.
– One of the least burdensome corporate filing requirements.
Counter:
– More complicated to form than other forms of partnership and sole proprietorship.
– Ownership may be more difficult to transfer because the LLC does not issue shares.
SERIES LIMITED COMPANY (SERIES LLLC)
Series LLC is one of the newest forms of corporation for a master LLC that has subsidiaries operating as independent LLCs, each protected from liability for the actions of the other LLC. Series LLCs cannot be formed in California, but Series LLCs formed in other states can register with the California Secretary of State and conduct business in California. Both Delaware and Nevada allow the formation of Series LLCs.
Advantages:
– Each unit can be managed independently from the others.
– Each unit has its own assets and liabilities.
– Each unit is protected from liability for the faults of other units.
– Owners enjoy personal liability protection.
– Each unit may be in the same business as the master LLC or run its own type of business.
– Units can be formed and dissolved by simple amendments to the Operating Agreement, without filing with the state. Hence, a reduction in legal, accounting, and administrative costs that would otherwise be incurred by some unconnected LLCs.
Counter:
– Each unit must maintain separate records.
– Since the Series LLC is a new entity, its tax status is unresolved and the case law is underdeveloped in some states. The IRS has not stated whether each unit will be taxed as a separate entity.
