Los Angeles, California Corporate Attorney Practice Group
Launching any business entity requires careful and thorough preparation. Our Los Angeles corporate lawyer practice group handles all aspects of your business entity, including, but not limited to:
Choosing between C corporations, S corporations and LLCs.† Choosing the right type of business entity for your business can make all of the difference.† To make the right decision, it is important to familiarize yourself with each type of entity, understand the tax implications for each type, and understand the liability protection each provides and how to preserve such protection.
One question many of our business clients ask is, "which type of business entity is the best one?” The answer to that question is that there is no one “best” type of entity for all circumstances and businesses, and that it depends on many factors, including, but not limited to, the size of your business, the type of business, the type of business assets the entity is to own, the state of incorporation and how it is financed.
C corporations: Typically, most big companies are C corporations. C corporations allow for a limitless number of shareholders, the ability to keep more income inside its reserve account, a fiscal year that may not necessarily follow the calendar year and several classes of stock for different types of investors. If a company is formed with the goal of one day going public, a C-corporation may be the best option.
One downside of a C corporation is that it is subject to double taxation, which means that the corporation is taxed on the corporate income, and a distribution from the corporation to the shareholders is taxed as the receiving shareholder’s personal income. However, some smaller C corporations may avoid this double taxation by distributing enough income to shareholders and/or employees so that the C corporation can report that there is no net income for the corporation.
S Corporations: While all corporations are initially incorporated as C corporations, qualifying corporations can elect to be treated as an S corporation. S corporations are typically smaller than C corporations, and enjoy certain tax benefits, but they typically do not have the flexibility of a C corporation.
The most common reason that a corporation elects to be an S corporation is that it enjoys pass-through taxation, rather than the double taxation of a C corporation. Pass-through taxation means that the net income of the corporation is not taxed on the corporation, and is rather passed onto the shareholders as personal income. In this way, an S corporation is taxed more like a partnership or sole proprietorship, rather than a C corporation.
Because of the pass-through taxation, S corporations often find it more beneficial to pay its shareholders through corporate distributions, rather than paying salaries. However, the IRS tax code requires that S corporations pay reasonable salaries to its shareholders who are also employees. Many businesses make the mistake of paying such shareholder-employees no salary, and suffer the negative tax consequences to the IRS, including a potentially higher chance of being audited.
To qualify for an S corporation election in California, a corporation must meet certain requirements, including, but not limited to: (a) not having more than one hundred (100) shareholders; (b) only having one class of stock; (c) only having shareholders that are either U.S. citizens or residents (no non-resident alien shareholders allowed); (d) only having natural persons as shareholders (as opposed to other corporations or LLCs as shareholders); and (e) the corporate profits and losses must be allocated proportionately amongst shareholders, depending on each shareholder’s respective interest in the business.
Unlike C corporations, S corporations almost always have a fiscal year that mirrors the calendar year (with some exceptions).
LLC (Limited Liability Company): While LLCs also enjoy the pass-through tax benefit that S corporations do, LLCs differ from S corporations because: (a) an LLC’s members do not have to be natural persons (for example, they can be corporations or other LLCs); (b) the rules allow LLCs to be more flexible in how profits and losses are allocated amongst its members (whereas S corporations are generally allocated in proportion with ownership interest); and (c) there is no 100 shareholder/member maximum on LLCs (which makes them ideal entities for syndication).
Some potential disadvantages of an LLC include, but are not limited to: (a) distributions of profits and salaries to LLC owners (members) are subject to self-employment taxes; and (b) an additional income tax is imposed on total incomes over $250,000 per year.
Unlike C corporations, but similar to S corporations, LLCs usually use the calendar year as their fiscal year.
To learn more about entity formation, contact one of our Los Angeles corporate lawyers today.
For more information on whether you are eligible to bring a voluntary dissolution of your corporation click here.
Involuntary Dissolution: If an Involuntary Dissolution of your corporation is your only option (i.e., if you are a minority shareholder), the provisions of California Corporations Code, Sections 1800 – 1809 will govern. Our Los Angeles corporate lawyer practice group can help you navigate through an involuntary dissolution of your corporation. Click here to learn more.
Compliance Issues: Whenever a California corporation dissolves, either voluntarily or involuntarily, it must adhere to rules of the California Secretary of State, the Internal Revenue Service (IRS), the California Franchise Tax Board (FTB), and the California Corporations Code. Our Los Angeles corporate lawyer practice group can help you (and your accountant) navigate through these laws.
To learn more about compliance with these government bodies, click here.
For example, a California corporation that is listed as “suspended” cannot be dissolved until it is first revived. Our Los Angeles corporate lawyer practice group can not only advise you on whether and how to revive your California corporation, but we can also assist in the dissolution of that revived corporation.
To learn more, click here.
As many people in the corporate world know, in the real world, corporate law overlaps with many other facets of law. That is why our Los Angeles corporate attorney practice group works in conjunction with these other legal divisions within our firm: