Business Entity Forms – Part II: C Corp, S Corp, LLC, Series LLC

C CORPORATION

A corporation is a legal entity that is owned by its shareholders (owners). Since it is a separate entity from its shareholders, the owners are protected from personal liability for the debts and obligations of the corporation. C Corporation is the most common form. The C Corporation is subject to tax under the Internal Revenue Code, Subtitle A, Chapter 1, Subchapter C, unless it elects to be taxed under Subchapter S. C Corps are subject to double taxation: first, the C Corporation itself pays taxes annually on your earnings; and second, shareholders are taxed when they receive these earnings as dividends. A California C Corporation is taxed on its net income at a rate of 8.84 percent; is also subject to a minimum annual franchise tax of $800. The estimated annual tax must be paid in four installments.

Corporation C. must comply with certain formalities in order not to lose its legal personality and protections. For example, you must create bylaws that regulate shareholder meetings, define the scope of authority of directors, etc.

Advantage:

– In general, there is no personal responsibility.

– Ownership can be easily transferred through the sale of shares.

– The corporation survives the death of the owners.

– Owners can issue and sell shares to investors to raise capital.

Cons:

– More expensive to set up and maintain than a sole proprietorship or partnership.

– Possible double taxation.

– Ongoing filing and reporting requirements.

S CORPORATION

An S Corp is a regular corporation or any business entity (ie, a partnership or LLC that elects to be taxed as a corporation), that elects to pay taxes under Subchapter S of the federal tax code. S Corp pays no taxes at the entity level and profits flow directly to the owners. California S Corp is taxed on your net income at a rate of 1.5 percent. The estimated annual tax must be paid in four installments.

Advantage:

– Avoid double taxation.

– In general, there is no personal responsibility.

– Generally, it survives the death of its owners.

Cons:

– You cannot have more than one class of shares.

– Ongoing filing and reporting requirements.

– One hundred shareholders max.

LIMITED LIABILITY COMPANY (LLC)

LLC combines the favorable tax treatment of partnership with the corporate shield of personal liability. The LLC owners’ liability for the debts and obligations of the LLC is limited to their financial investment, but members have the right to participate in the management of the business as general partners.

In California, for income tax purposes, an LLC with more than one member is taxed as a partnership, and an LLC with only one individual member is taxed as sole proprietorship. Instead, LLCs can choose to be taxed as a corporation by filing an election on a Form 8832 with the IRS. California taxes the LLC and its owners the same way the IRS does, plus the $800 minimum annual tax for the privilege of doing business in the state. An LLC, whether California or foreign, may not provide professional services.

Advantage:

– Easier and faster to form than a corporation.

– In general, there is no personal responsibility.

– No double taxation.

– One of the least burdensome corporate filing requirements.

Cons:

– More complicated to form than other forms of partnerships and sole proprietorships.

– Ownership can be more difficult to transfer since LLCs do not issue stock.

SERIES LIMITED LIABILITY COMPANY (SERIES LLC)

Series LLC is one of the newer corporate forms for Master LLCs that have subsidiaries that operate as independent LLCs, each of which is protected from liability for the actions of other LLCs. The serial LLC cannot be formed in California, but a serial LLC formed in another state can register with the California Secretary of State and conduct business in California. Both Delaware and Nevada allow the formation of Series LLCs.

Advantage:

– Each unit can be managed independently of the others.

– Each unit has its own assets and liabilities.

– Each unit is protected from liability for the misdeeds of other units.

– Owners enjoy personal liability protection.

– Each unit can be in the same business as a Master LLC or conduct its own type of business.

– Units can be formed and dissolved by simple modifications to the Operating Agreement, without presentation to the State. Thus, the legal, accounting, and administrative fees that would otherwise be incurred by multiple unconnected LLCs were reduced.

Cons:

– Each unit must keep separate records.

– Since Series LLC is a new entity, its tax status is unresolved and the case law is underdeveloped in some states. The IRS has not stated whether each unit will be taxed as a separate entity.