If you are operating a business without placing the business in an entity, you and your personal assets may be subject to business creditors’ claims.
To avoid this, you may want to consider forming either a statutory close corporation or a limited liability company.
The statutory close corporation, sometimes referred to as S corporations, is a creature of state law and is formed like any other corporation by filing the articles of incorporation with the Secretary of State. The corporation then issues shares to its owners. Assuming compliance with statutory formalities, shareholders then enjoy limited liability with respect to the debts of the corporation. The S-corporation refers to the option of the corporation to be taxed under Subchapter S of the Internal Revenue Code. This provides for pass-through taxation, meaning that the income of the corporation passes through to the shareholders and the corporation is not taxed. This avoids the problem of double taxation of regular business corporations (C Corporation).
The LLC is also a creation of state law formed by filing articles of organization with the Secretary of State. California allows for single-member LLCs. An LLC provides limited liability for all its members, managers and officers for any judgment, debt, obligation or liability of the LLC to the same extent as corporations provide for their shareholders, directors and officers.
LLCs are often compared to S corporations because both offer limited liability and pass-through taxation. In general, LLCs offer a great deal of flexibility in relation to S corporations. For example, S corporations are subject to certain restrictions on the number and type of shareholders they may have. LLCs are not subject to any of these restrictions. Also, LLCs are more attractive because they do not require the same formalities as corporations.
Finally, before deciding which business entity is best to protect the owners of your business from potential personal liability, there are tax advantages and disadvantages that must be considered.
For a complimentary consultation to discuss your business planning needs, please contact Susana B. Tolchard. Tax advice is also available through the Business Advisory Group.
For more information please call, 661-287-9986 or visit www.SCVBusinessAdvisoryGroup.com .