California Business Entities
The sole proprietorship has no existence apart from the owner; profit or loss (Schedule C) entered on the individual’s tax return. The owners are not protected from the judgments against nor liabilities of the business.
An ownership of two or more persons to carry on as co-owners a business for profit. A partnership can hold property, sue, and file for bankruptcy in the partnership’s name.
Every partnership not formed under the law covering limited partnership is a general partnership. No written agreement is necessary. Two kids who have a lemonade stand and split the profits have a partnership. Partners share risk according to the partnership agreement, if there is one. Partners are exposed to unlimited liability to outsiders; they are not protected from the judgments against nor liabilities of the business. Partners share control equally unless agree otherwise.
A partnership formed by two or more persons under the laws of California concerning limited partnerships and having one or more general partners and one or more limited partners. The limited partnership is created on filing a Certificate of Limited Partnership with the California Secretary of State. ($700) and paying the minimum tax ($800). General partners have unlimited liability, and often a corporation or LLC is formed to act as general partner. Limited partners risk loss of only their capital contribution (like a shareholder) unless they participate in management of the limited partnership. A limited partnership is managed by general partners, and must comply with securities law.
Corporations are formed by filing Articles with the California Secretary of State ($100). Shareholders risk only their investment unless the court pierces the “corporate veil”. Lenders and creditors may require personal guaranties. Directors determine policy, Officers manage business in the ordinary course.
Most large corporations are C Corporations. They have a lot of flexibility- multiple classes of stock, a fiscal year may be elected, they can have an unlimited amount and type of shareholders, for example. The C Corporation must obtain an Employer Identification Number (EIN) and file a Tax return each year C corporations are taxed on taxable income after deductions for salary, business expenses and depreciation on furniture and equipment. The C Corporation can deduct the cost of Medical Insurance, Disability Insurance and Medical, Dental, and Drug Expense Reimbursement Plans, for the employees. The shareholders are taxed on any dividends paid by the corporation.
Federal tax at the corporate level is on a sliding scale:15% of $50k; 25% next $25k; then 34%. If profits are distributed to shareholders as dividends, the shareholders are then taxed. In a smaller C corporation, this can be avoided by paying enough out as salary to shareholder – employees. Also, health insurance and other benefits for the employees may be paid by the corporation. Losses are not directly usable by shareholders.
The California state tax on a C corporation is 8.84% of net income, with a minimum of $800.
Smaller corporations are often S corporations S corporations have pass-through tax treatment, meaning that there is no tax at the corporation- net income is reported on the individual shareholders’ tax returns through schedule K-1, which reports the shareholders proportionate share on income. The S Corporation must obtain an Employer Identification Number (EIN) and file a Tax return each year, The S Corporation must file a subchapter “s” election with the Internal Revenue Service on Form 2553 within 75 days after incorporating. The S Corporation is simpler and not as flexible as the C corporation; it may not have more than 35 shareholder’s, or a shareholder that is not an individual (eg. partnership or corporation) or is a non-resident alien, or have more than one class of stock. An S corporation may provide health insurance, disability insurance, automobile, and medical, drug and dental plan reimbursements, but they would be treated as income to the shareholders.
A Statutory Close Corp. can avoid normal corp. procedures and formalities (eg. operating through sh’s and director’s meetings). The IRS may treat it as a partnership if too informal; lenders may want corporate resolutions.
The only option for some licensed occupations.
Limited Liability Company
An LLC is created on filing Articles with the California Secretary of State ($70); and must pay the minimum tax in its 4th month ($800). An LLC combines the corporate limit on personal liability with a partnership-style flow-though taxation and flexibility. LLCs are ideal where the situation is ineligible for an S Corporation, such as small businesses with active parties. The LLC may have just one member. An LLC with more then one member is treated as a partnership for tax purposes, unless a special election is made. The LLC must obtain an Employer Identification Number (EIN) and file a Tax return each year. The LLC is governed by the Operating Agreement.
California charges tax (really a fee) based on gross income, on a sliding-scale: LLC Fees on Income: $250,000-499,000k $900; $500,000-999,999: $2500