After deciding to start a business, the owner(s) – partners, members or shareholders – must determine what is the best business entity to operate under the law, where to incorporate, what the tax implications and considerations in choosing an entity are, and what other formalities are required by Local, State, and Federal laws and regulations
What is the difference between an LLC and S-Corp?
There are three main differences between an LLC and S-Corp:
- LLCs do not have a board of directors or executive board, but rather members and managing members that run and operate the business,
- S-Corp’s have corporate formalities, such as annual meeting and meeting minutes, election of board of directors and executive board, issuance of shares or stocks, and have at least one employee (which is normally the owner or one of the owners), while an LLC does not have these formal requirements, and
- both entities can be pass-through taxation, but only the LLC can be taxed as a partnership.
What is the difference between pass-through taxation and double taxation?
Double taxation occurs with a C-Corp or an LLC which elects to be taxed as a C-Corp, and it means that the entity will be taxed the first time on the profits of the company (at the corporate tax rate) and then distributions to the shareholders or members are taxed again based on their personal income tax rates. In contrast, an S-Corp or an LLC which elects to be taxed as a partnership or S-Corp will receive pass-through taxation treatment, which means the taxes are directly pass to the members or shareholders of the entity based on their proportional percentage ownership in the entity and they file such taxes on their personal income tax returns.
For example, if a company makes $100,000 USD in profit, the different tax treatments are as follows:
- C-Corp and LLC elected to be taxed as C-Corp: $100,000 USD profit taxed at 30% (rate as of 2014), so $30,000 USD. Then the shareholders will be distributed the remaining $70,000, which is taxed again at their respective personal income tax rates.
- S-Corp and LLC elected to be taxed as partnership or S-Corp: $100,000 USD profit will be distributed to the members or shareholders and be taxed only once at the respective personal income tax rates.
What is the difference between a C-Corp and S-Corp?
Operationally, the two entities are the same with two main differences:
- C-Corp has double taxation and an S-Corp has pass-through taxation,
- C-Corp can become a publicly traded company, when an S-Corp cannot,
- C-Corp can have non-resident, non-US citizen shareholders and entities, when a S-Corp can only have real persons who are US citizens or permanent residents as shareholders.
What are the limited liability protection differences of an LLC, S-Corp, and C-Corp?
All three entities have the same level of limited liability protection, i.e. the liability exposure of the individual member or shareholder is limited to their capital contribution to the entity and any assets the entity may have. For example, if the person contributed $100,000 USD to the entity and the assets of the entity were valued at $100,000 USD, then the maximum liability exposure of the person and company would be $200,000 USD, as the liability is limited.
How many business entities are there in California and what are they?
There are four (4) main types of business entities permitted to do business in California:
- sole proprietorship, also known as DBA or doing business as or fictitious business name,
- Limited Liability Company,
- S-Corporation, or
- C-Corporation.
Also, there are sub-types of these main four (4), such as the limited liability partnership, limited partnership, general partnership, professional corporation, a professional law corporation, a professional medical corporation, public benefit corporation, and flexible purpose corporation. Moreover, the law may change to add or subtract some of these entity types.
Can a non-US citizen or foreigner own shares in a S-Corp?
No, only a natural person, who is a US citizen or permanent resident can own shares in a S-Corp, which also means that other business entities cannot own shares in a S-Corp.
Can a non-US citizen or foreigner own shares in a C-Corp?
Yes. Also, other entities can own shares in a C-Corp as well.
What is the difference between a closely-held corporation and a S-Corp?
The election to be treated as a S-Corp means that the entity can only have 100 shareholders maximum and if that entity also chooses to be a closely-held corporation, then the maximum number of shareholders can only be 35. Not all S-Corps are closely-held corporations and not all closely-held corporations are S-Corps. Moreover, a C-Corp can also elect to be a closely-held corporation.
Can a non-US citizen or foreigner own membership interests in an LLC?
Yes.
Can one person in a corporation be the President, Vice President, and Secretary?
Yes.
What are the legal documents required to open a business bank account?
The three main documents required are:
- the articles of organization/incorporation,
- operating agreement/by-laws, and
- Federal Employer Identification Number.
These three documents need to be submitted to a business banker to open a business bank account for the business entity.
What are the fixed fees associated with opening a business in California?
In California, all business entities are required to pay an annual franchise tax fee to the Franchise Tax Board of $800 USD (as of 2014), and also the city or county business license fee, which ranges from $50 USD to $200 USD depending on the location. In the first year of operation, the S-Corp and C-Corp are exempt from paying the franchise tax, but still need to apply and pay a business license fee. An LLC is required to pay the $800 USD franchise tax fee on the 15th day of the Fourth (4th) month after the date of incorporation, which is provided onthe top right hand corner of the stamped and filed version of the articles of organization.
What types of tax elections can I select with an LLC?
An LLC can elect to be taxed as a partnership, S-Corp, or C-Corp.
What are the insurances I need to operate my business?
The minimum insurances required for any California business are:
- premises liability insurance,
- worker’s compensation insurance if the entity has employees, and
- health care insurance (pending legislation on the Affordable Health Care Act of 2013).
Aside from these mandatory insurances, a business entity can also increase liability protection by purchasing directors and officers, errors and omissions, key-person, umbrella, data, professional liability, and many other insurances depending on the industry. Ask your insurance professional for details.
