Is an LLC Right For You?
Below is a short list of pro’s and con’s to forming an LLC. This list is not exhaustive and before making a decision you should consult with a qualified small business attorney.
Limited Liability – Members are protected from personal liability for some actions of the LLC. This means that if the LLC incurs debt or is sued, members’ personal assets are usually exempt. However it’s called “limited” for a reason, members are not necessarily shielded from all wrongful acts.
Less Paperwork – An LLC’s operational ease is one of its greatest advantages. Compared to a corporation, there are far fewer formalities and smaller start-up costs.
Sharing of Profits – There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. This leaves it up to the members to decide how to divide the pie.
Costs – In California LLC’s are subject to an automatic $800 annual fee to the Franchise Tax board.
No Pro’s Allowed – A California LLC also cannot offer professional services, or services which require licenses, such as medical, legal, accounting, and other services.
There are many advantages to forming an LLC. However, this information is just a basic guide to understanding LLC’s as there are many options and ways you can organize your business to grow and succeed. In addition, although an LLC offers a lot of flexibility, another choice of organizational structure may be a better fit for you and your team.
Corporation * And finally we have the corporation. For most small businesses and entrepreneurs who decide they are going to go with a corporation as their choice of entity, they will most likely choose to go with the “S” corporation. There are also “C” corporations but those are typically for larger ventures. If you have an interest in forming a “C” corporation please contact us and we would be happy to discuss that with you.
The Corporate structure is more complicated than an LLC but can be a tax saver. Again, it is vitally important to talk with your CPA. f you are going to form a Corporation you should probably have an awesome CPA you trust and can work with fairly regularly.
In general, the corporation does not pay federal income taxes. Instead the corporation’s profits or losses are passed down to all of the shareholders who are part owners in a corporation. The shareholders then report the profits or losses on their own individual tax returns.
If you are an employee or perform a major service to the S-Corp, then you will likely receive a salary that will be subject to normal employment tax rates. This salary must be “reasonable” in comparison to your industry and your region. Any other money that you receive on top of your salary, is a profit and is likely subject to a much lower rate.
As you may have guessed, corporations have lots of rules, requirements and filings. The corporation must hold annual meetings and keep meeting minutes; it must file annual reports and file much more formation information filed with the state.
If you go with a Corporate structure you must make sure you comply with the annual requirements and more to keep your limited liability protection. Luckily, we have plans available to help keep you on track of your corporate formalities and will even come and hold your annual meetings and minutes for your corporation!
* Disclaimer: The above is solely legal information and is NOT intended to be taken or construed as legal advice. While some of the above information may be applicable in other jurisdictions it was written for businesses within California. The attorneys at Surf Side Law are practitioners licensed by the State of California, and the distribution of this legal information does NOT constitute an Attorney-Client Privilege.