Business Entities - C-Corporations and S-Corporations - Similarities

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

C-Corporations and S-Corporations - Similarities

1. Limited Liability Protection - Both of these legal entities have limited liability protection.  All Shareholders who purchase their ownership by purchasing shares of the corporation's stock are limited in their liability.  They can not be held personally liable.  They also can only lose their investment, or the amount of money paid for the corporation stock.
2. Separate Entities - Both of these legal entities are just that separate legal entities from any of the shareholders, directors or officers of the corporation.
3. Filing Documents - In order to create the legal entities, both C-Corporations and S-Corporations require papers be filed with the state in which they are incorporating. The documents are typically called "Articles of Incorporation" or "Certificate of Incorporation" depending on the state, 
4. Structure - Both legal entities have shareholders, directors and officers.  Shareholders are the owners of the company whom elect the board of directors.  The board of directors oversee and direct corporation affairs and business.  The directors elect the officers of the corporation.
5. Corporate Formalities - Both legal entities are required to adopt bylaws, issue stock, hold shareholder and board of director meetings, filing annual reports, and paying expenses.  All of these are internal and external formalities that both of these type of legal entities are required to accomplish.

Business Entities - Corporations

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Corporations
A California corporation generally is a legal entity which exists separately from its owners. While normally limiting the owners from personal liability, taxes are levied on the corporation as well as on the shareholders. The sale of stocks or bonds can generate additional capital and the longevity of the corporation can continue past the death of the owners. Legal Counsel should be consulted regarding the variety of options available.

To form a corporation in California, Articles of Incorporation must be filed with the California Secretary of State’s office. Forms for the most common types of Articles of Incorporation are available on our Forms, Samples and Fees webpage. You may use the form or prepare your own statutorily compliant document.

The C corporation is the standard corporation, while the S corporation has elected a special tax status with the IRS. It gets its name because it is defined in Subchapter S of the Internal Revenue Code. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met.

In Monday's blog, I will discuss the similarities between C corporations and S corporations.  In Wednesday's blog I will discuss what makes the two different.  There are several differences and similarities that I felt that we needed to spend a few extra days on this business type. 

Business Entities - Limited Liability Company

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Limited Liability Company
A California LLC generally offers liability protection similar to that of a corporation but is taxed differently.  Domestic LLCs may be managed by one or more managers or one or more members.  In addition to filing the required documents with the Secretary of State, an operating agreement among the members as to the affairs of the LLC and the conduct of its business is required.  The LLC does not file the agreement with the Secretary of State but maintains it at the office where the records are kept.  To form an LLC in California, Articles of Organization (Form LLC–1) must be filed with the California Secretary of State’s office.

An LLC is a hybrid business entity that blends elements of partnership and corporate structures. The LLC’s main advantage over a partnership is that, like the owners (shareholders) of a civil law corporation, the liability of the owners (members) of an LLC for debts and obligations of the LLC is limited to their financial investment. However, like a general partnership, members of an LLC have the right to participate in management of the LLC, and profit or losses flow through to its members.  An LLC may not be formed by certain types of businesses that provide professional services requiring a state professional license, such as legal or medical. For California income tax purposes, an LLC will be classified as a partnership if it has more than one owner and will be treated as a disregarded entity if it has only one member.  However, an LLC is allowed to elect to be treated (taxed) as a corporation. To be taxed as a corporation, the LLC files an election on Federal Form 8832, Entity Classification Election, with the Internal Revenue Service. California conforms to the federal entity classification regulations commonly known as "check-the-box regulations" that allow an LLC to elect to be taxed as a corporation. 

Business Entities - Limited Partnership

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Limited Partnership
A California Limited Partnership may provided limited liability for some of the partners.  There must be at least one general partner who acts as the controlling partner and one limited partner whose liability is normally limited to the amount of control or participation of the limited partner.  General partners of a Limited Partnership have unlimited personal liability for the Limited Partnership's debts and obligation.  To form an LP in California, a Certificate of Limited Partnership (Form LP–1) must be filed with the California Secretary of State’s office.

The Limited Partnership files taxes by using the Form 1065 for the Federal Government and a 565 for the state government.  This partnership does have a $800 minimum tax due at the state level.  Each of the partners receives a K-1 with their share of the income/loss which they transfer to their own personal taxes.

The Limited Partnership is a flexible form of business.  It is designed primarily for specific professional services.  The partners decide the structure of the organization and the distribution of profits and losses.  a written partnership agreement is advisable. 

Business Entities - General Partnership

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

General Partnership
This is the simplest form of business for two or more people.  This is basically a Sole Proprietorship for two or more people.

A California GP must have two ore more person engaged in a business for profit.  Except as otherwise provided by law, all partners are jointly and severally for all obligations of the partnership unless agreed by the claimant.  Partners make the business decisions of the Partnership together.  Profits are taxed as personal income for the partners.  To register a GP at the state level, a Statement of Partnership Authority (Form GP–1) must be filed with the California Secretary of State’s office. Interesting fact:  registering a General Partnership at the state level is optional.

The General Partnership files taxes by using the Form 1065 for the Federal Government and a 565 for the state government.  This partnership does not have a minimum tax due at the state level.  Each of the partners receives a K-1 with their share of the income/loss which they transfer to their own personal taxes.

The following are some things to consider regarding a General Partnership.  A partnership is a flexible form of business and relatively easy to set up.  The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.  A separate bank account should be established to run the operations.  A partnership allows more than one owner, unlike a sole proprietorship.  The cost to form a partnership is generally less expensive than forming a corporation.  The items of income, deductions, and credits flow through from the partnership to each partner’s California Schedule K-1, Partner’s Share of Income, Deductions, Credits, and distributive shares of property, payroll, and sales.  Each partner is responsible for paying taxes on their distributive share.  In a general partnership, each partner is personally liable for all business debts and lawsuits.  A partnership exists as long as the partners agree it will and as long as there are at least two partners, one of whom is a general partner.

Business Entities - Limited Liability Partnership

In the state of California, the following are the business entities that are allowed: 

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Limited Liability Partnership
An LLP is a partnership that engages in the practice of public accountancy, law, architecture, engineering or land surveying.  It also can provide services or facilities to a California registered LP that practices public accountancy or law or to a foreign LLP.

An LLP is required to maintain certain levels of insurance by law.  To register an LLP in California, a Form LLP-1, an Application to Register a Limited Liability Partnership must be filed with the California Secretary of State’s office.

An LLP is a form of ownership in which all the partners receive limited liability protection. An LLP is similar to a general partnership in that all the partners can take an active role in managing the day-to-day affairs of the business. The LLP form of ownership is limited in the State of California to persons licensed to practice in the fields of public accountancy, law, architecture, engineers or land surveyors.  In order to form in California, an LLP must first register with the California Secretary of State. An LLP formed in another state must register with the California Secretary of State prior to conducting business in the state.

In an LLP, there are two classes of partners, general partners and limited partners.  The general partners have unlimited liability and the limited partners have limited liability.  The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.  Because it is a form of Partnership, the Partnership will file a form 1065 to file their taxes with the IRS.  The items of income, deductions, credits, and shares of property, payroll, and sales flow through from the partnership to each partner’s California Schedule K-1. Each partner is responsible for paying taxes on their distributive share.  A LLP remains in effect based on partners agreeing to a termination date.  LLPs do not pay income tax but they are subject to the annual tax of $800.

Business Entities - Sole Proprietorship

In the state of California, the following are the business entities that are allowed:

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Sole Proprietorship
Sole Proprietorship is basically going into business for yourself as yourself.  This is the government allowing you as a person to own and operate your own business.  You will have total control and make all decisions on your business.  You receive all profits from the business and you are responsible for all taxes and liabilities of the business.

If you call the business something other than the person who owns it name, you need to file a form called a Fictitious Business Name Statement with the county where the principal place of business is located.  Example:  You are Joe Smith.  You want to open a Card Shop.  You want to call it Joe's Card Shop.  You will need to file a Fictitious Business Name Statement, because it does not have your full name as part of the business.  No formation documents are filed with the California Secretary of State's Office.  You can request a tax identification number from the IRS to identify your new business.  I suggest this so that you do not need to give everyone your social security number when they ask for the business' tax identification number.

Taxwise, it is easy for you to file the taxes.  You file it along with your own personal taxes on your 1040 (and 540 for the state of California).  To capture the business information, you will file a separate schedule C for each separate business you operate as a sole proprietorship.  The total of all of the schedule Cs will be entered on line 12 as income (or loss if negative).

Advantages of this type of business is you own this entity, and no one can take it away from you.  You also make all the decisions.  This means who to do business with, how to advertise, who you want to employ (if any one) and so on.  All decisions are yours.  You also get all of the profit.

Disadvantages of this type of business is that you bear all of the liability.  For instance if you sign a year long lease and the business fails on month 2, you will still owe 10 more months of a lease you will have no use for the building.  If someone sues the business, they are suing you.  All expenses are your responsibility.  No getting out of it.  You also will need to pay Self employment tax.  This could mean putting some of your income aside and paying it to the government once a quarter.