Business Entities: Should I Incorporate my Business?
The legal structure you choose for your business has a great impact on your operations. There are three factors to consider when deciding: nature of the business, limited liability and tax treatment of the business and its owners. Let’s investigate the business entities.
Sole Proprietor. This is the simplest form because it does not require a formal creation, you do not have to file a separate tax return, you just add and Schedule C to your personal tax return, it is easy to operate because there is no requirement for regular meeting and minutes. However, it does not offer liability protection, meaning if you get sued, not only your business possessions but your personal possessions can be compromised. You are also required to pay self-employment taxes on the entire profit of your business and that is a 15.3% rate.
Single Member LLC (SMLLC). It is an attractive entity because it is easy to operate, you do not have to file a separate tax return, just add a Schedule C to your personal tax return and provides with liability protection. However, you need to file with the CA Secretary of State the proper documentation and you pay self-employment taxes on all your profit, transfer of ownership can be complex and fringe benefits to owners are limited.
Multimember LLC. As the SMLLC, this entity offers limited liability for all its members, it’s considered separate from its members and has greater flexibility in operations. Ownership can be transferred relatively easy. However, you need to file the proper filing with the CA Secretary of State, it requires filing a separate tax return (1065 IRS form) and members pay self-employment taxes in their share of profit.
General Partnership. This entity is easy to create, there is no limit on the partner number or type, can be used to hold investments in other businesses, there is no double taxation and offers flexible allocation of profits, loss, and distributions. However, it requires a separate tax return (1065 IRS form), unlimited liability for all partners, requires tracking of the basis for partners, both inside and outside the partnership and the partner’s share of income is subject to self-employment taxes.
Limited Liability Partnership. Its an entity that offers liability protection for limited partners as it is considered a separate entity from partners, limited partners’ liability is limited to their investment in the business and there is no double taxation. However, limited partners pay self-employment tax on guaranteed payments (distributions), its limited liability status for damages can be lost for a variety of administrative reasons, requires a separate tax return and requires tracking of the basis for partners, both inside and outside the partnership.
C Corporation. This entity requires offers no liability for non-active stockholders, there are no restrictions on ownership. Ownership can be transferred through the sale of stock, it is considered a separate entity from stockholders, offers fringe benefits for owner-officers and raising capital can be achieved by issuing stock. However, it requires filing with the CA Secretary of State, it is complex and expensive to create and maintain, it is subject to double taxation of profits: at the entity level and at the shareholder level, require regular board of directors’ meetings and minutes and requires a separate tax return (1120 IRS form).
S Corporation. This entity offers liability protection similar to that of C corporations, no double taxation of profits, ownership is easily transferred through the sale of stock, it is considered a separate entity from stockholders, and losses can offset shareholders’ other taxable income. However, requires filing with the CA Secretary of State, it is complex and expensive to create and maintain, officers MUST BE ON PAYROLL, meaning they will be employees of the corporation and receive at the end of the year a W2 form from the corporation, requires a separate tax return (120S IRS Form), requires regular board of directors’ meetings and minutes, requires tracking of basis for stockholders, ownership is limited to specific types of entities and fringe benefits for owner-employees is limited.
What entity is better for you? We can offer consultation. It really depends on your plans for your business and the risk you are willing to take. Let’s talk about it! If you decide that incorporating is a good fit for your business, we can help! Our program is an ALL INCLUDED SERVICE, so you can start running your business worry-free about legal compliance. We make sure that all requirements are considered and addressed appropriately.
Business Filing Service: All included for $499!!
- Name Availability Check
- Official Filed Articles of Organization
- Custom Operating Agreement and Minutes
- Expedite Filing: 24-Hour Document Preparation
- FREE Registered Agent Service for 1 Year ($55 yearly)
- Federal Tax ID Number (EIN)
- Customized LLC Kit & Seal
- California Initial Report Filing (Required during the first 90 days of filing)
- Business License Registration
- Print Delivery
- Shipping & Handling
- State Sales Tax Registration (Seller’s Permit) $99
- Prepare S-Corp Election $35
- Employer Tax Registration $99
According to the California Secretary of State, many corporations, limited liability companies, and limited partnership documents are returned for correction without being filed because of name issues, errors, omissions or misstatements contained in the proposed filings submitted.
Disclaimer: This information does not provide legal advice and is not a substitute for professional legal advice. It is intended for informational purposes only.