California Business Entities: Incorporate or Not to Incorporate
If you created a business in California, it may be in your interest to file an incorporation application through the Secretary of State. Corporations provide a business with numerous benefits, such as the ability to attract investors, while at the same time protecting the owners of the business from complications that may arise. Creating a corporation also allows for the establishment of a clear power structure of shareholders, directors, and officers: Shareholders are the principal owners of the corporation and are generally not financially responsible for debts incurred by the corporation, Directors make sure that shareholder assets are secure by planning long-term goals for the corporation, as well as hiring (and firing) the officers who perform the corporation’s day-to-day tasks.
The state of California also allows you to file for incorporation as one of five different entities, listed below: Corporation – A completely separate taxable entity that is created apart from the owners and helps protect the owner from debt and the legal liability that the corporation may incur. . Limited Liability Companies: Protects an owner’s assets from debt, while allowing profits to flow directly to individual owners, where they pay taxes on a portion of their income. General Partnership: Maintains responsibility over the owners, who are known as partners, but equally distributes profits or debts to each partner in the business.
Limited Partnership – A combination of general partners and one or more limited partners who are only responsible for debts equal to their investment and do not manage the business. Limited Liability Partnership: Each partner’s liability varies and each partner is not responsible for another’s. bad behavior. In California only certain businesses can form these.
What a corporation needs to file:
In order for your company to become a corporation, it is necessary to file a series of documents and pay various fees. First, your applicant corporation must file the Articles of Incorporation, which is a single document that includes: the name of the corporation, the California Corporations Code, and the name of the initial agent for service of process, among other items. The fee to file a company’s articles of incorporation is $100, plus an additional $15 if filing by hand. After filing the Articles of Incorporation, an Information Statement must be submitted within 90 days for a fee of $25 or $20 if you are a non-profit company. This form requires the most basic information about your corporation, such as location, name, and type of business. However, this particular form must be resubmitted annually by the corporation and twice a year by a non-profit corporation, as failure to comply can result in suspension from the corporation. Your corporation is also responsible for keeping many other internal forms on file at all times. For one thing, your corporation should have an established and agreed upon set of bylaws. Bylaws essentially act as your corporation’s constitution for how it will operate. Below are any and all corporate resolutions, which are documents approved by your board of directors about what actions specific people are authorized to take. Lastly, your corporation must keep minutes on file, which is the documentation of all meetings of shareholders and directors. Failure to include any of the above documents could be extremely costly for your corporation in a lawsuit.
Types of Corporations:
When choosing to become a corporation, your business can select to be a C corporation or an S corporation. The crucial difference between a C or S corporation is how the business is taxed. In a C corporation, a separate business entity is created that is owned by the shareholders. Because of this, the corporation pays taxes on its annual profits, but its individual shareholders also pay taxes on the profits that are distributed as dividends. An S corporation is like a hybrid business entity. It still creates separate legal entities and that offers liability protection to shareholders, however it pays very low income taxes as only dividends awarded to individual shareholders are normally taxed. This can be seen in the different amounts each type of corporation is taxed under the California Franchise Tax Board. For a C corporation in the State of California, its annual net income is taxed at a rate of 8.84 percent, with a minimum tax of $800, while for an S corporation, its annual net income is taxed at a rate of 1.5 percent. cent, with a minimum tax of $800. In addition to the state income tax in a C corporation, the corporation also pays large percentages (varying based on income) at the federal level by the IRS, while an S corporation does not. Despite the inherent benefits of an S corporation, they are difficult to maintain if you are thinking of expanding your business due to the strict requirements set by the IRS. To maintain an S corporation, you must meet the requirements of having fewer than 100 shareholders at any time and having only one class of stock. These requirements make an S corporation much more conducive to a small business.
Limited Liability Companies (LLC):
By choosing an LLC, your business will be run similar to a normal corporation, except that the owners (shareholders) are called members. Members act in the same way as a shareholder in a corporation would in that they are generally not liable for the debts of the business, but they are not limited to simply being a natural person. Members of your LLC can be other partnerships, corporations, or any other business entity. An LLC requires two main documents to be filed with the Secretary of State in order to be created. First, the Articles of Organization form, which costs $70, must be filed. The articles of organization act as bylaws for your LLC and mainly include basic information, such as the company name, location, and managers and members. Second, an Information Statement (which includes much of the same information within the articles of organization) must be filed within 90 days of the articles of organization and re-filed twice a year for a fee of $20. Failure to resubmit the information statement may result in the suspension of your LLC as a California business entity. Along with the mandatory document that you present, there are some documents that must be kept internally in the records at all times, such as articles of incorporation, resolutions and the operating agreement. An LLC’s operating agreement, in essence, is the same as a regular corporation’s bylaws, in that it lays out a set of rules for how your business will be run. Taxes for an LLC are also drastically different than your normal corporation. For example, in LLCs you don’t pay taxes as two separate entities, so you wouldn’t pay federal income taxes as a corporation. What happens in an LLC is that the profits made go directly to the members where they are taxed as part of an individual’s income. However, the State of California through the Franchise Tax Board still taxes LLC’s annual income at a rate of 8.84 percent with a minimum tax of $800.
General Partnerships (GP):
If you choose to join as a GP, you will need at least two or more partners who will be responsible for the profits and liabilities of the business they run. As such, each partner in your business will get a proportional share of any profits or debts the business may incur. However, this also means that each partner is equally responsible for any misconduct that another partner may commit. Unlike other forms of incorporation, a GP does not require any filing of documents with the Secretary of State. In fact, two people can be involved in a GP simply by word of mouth. Due to the lack of tangible legal evidence, this proof of your partnership is recommended by filing a Statement of Partnership Authority with the Secretary of State. The document fee is $70 and creates a binding agreement between you and your partners that can only be terminated by a Declaration of Dissolution or death of a partner. Forming a partnership comes with tax benefits as it avoids the creation of a second taxable entity that occurs when a basic corporation is formed. In GP, the profits made go directly to you and your partners, where they are taxed as normal income.
Limited Company (LP):
Similar to a GP, an LP requires two or more people to come together in creating their partnership; however, these partners are divided into two groups of limited partners and general partners. Limited partners invest in your business and may receive a portion of the profits, but do not participate in the actual running of the partnership. Similarly, general partners are responsible for all financial responsibilities and running their business. An LP (Law 339 Assembly) is required by law to have at least one general partner at all times and one limited partner. Also, unlike general practitioners, an LP is required to file a Certificate of Limited Partnership through the Secretary of State for a fee of $70. The taxation of an LP is also no different from that of a GP, since only profits distributed to partners are taxed. However, there is a significant difference with taxes, and that is that all limited partners must pay an annual tax of $800 to the Franchise Tax Board.
Limited Liability Companies:
An LLP is like a GP in that it requires you to have two or more partners to create it, but it differs in that each partner’s personal liability to the company varies. That is, you could be more responsible for 70 percent of all debts, while your partner is limited to only 30 percent. In California, LLP formation is limited to public accounting, law, and architectural practices only. If your business falls into one of these three categories, you can register to become an LLP by submitting the Registered Limited Liability Partnership Registration Form for a fee of $70. Since LLPs are still partnerships, they do not comply with annual meetings and the acts that normal corporations must comply with, which some consider an advantage. In terms of taxes, choosing an LLP is taxed like all other forms of partnership, where the profits from your business go directly to your partners and are taxed as part of their individual income, but on top of that, LLPs must pay $800 for year by the Franchise Tax Board.