WHICH BUSINESS ENTITY IS BEST:
In California, a business owner can choose among a variety of business structures, each with its own advantages and disadvantages. The most common forms of business entity are the Sole Proprietorship, the Corporation, and the Limited Liability Corporation (or “LLC”). Our office typically does not recommend the use of General Partnerships, because it makes you personally liable for any contracts entered into by your partner(s).
Sole Proprietorship
The single proprietorship is the most basic type of company entity. This is a somewhat informal entity that requires minimal time or money to set up but provides no limitation of personal responsibility or income tax benefit. A sole proprietorship, on the other hand, is not obliged to pay the $800 minimum fee to California’s Franchise Tax Board, making it an excellent alternativ for newly founded or secondary/sid enterprises. Personal responsibility is often not a problem for single proprietorship owners since they may limit any possible damages with proper insurance
coverage.
Income earned through a sole proprietorship is subject to of real self-. employment taxation. The self-employment tax rate is 15.3% for income received in 2013 and 2014.’The rate is divided into two components: 112.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). The first $117000 of your total salary, tips, and net profits in 2014 are liable to any combination of the Social Security portion of self–employment tax, the Social Security tax, or the railroad retirement·(tier 1) tax. All .of your current year’s combined salaries, tips, and net profits are liable to any combi· na·tion of the 2.9% Medicare portion of Self-Employment tax, Social Security tax, or railroad retirement (tier 1) tax.
If you will not be the sole proprietor of your new firm (or even if you will), you should think about incorporating or founding a limited liability company.
Corporations
The ideal corporate structure for many small firms is a Subchapter S Corporation, sometimes known as an S-Corp. A Subchapter S. Corporation is a separate legal entity from the owners, and so protects the owners from personal culpability in most situations. It also provides tax benefits in terms of self-em ployment tax if correctly run. A Subchapter S Corporation’s income and losses are distributed to the owners as if they were partnership distributions – a Subchapter S Corporation owes no federal tax at the corporate level. Corporations that qualify for and opt to be taxed as an S-corp are taxed at 1.5% of their net earnings in the first year, and the greater of 1.5% or $800 each year in subsequent years. Quarterly estimated taxes are paid.
There are several constraints that might make Subchapter S Corporations unviable for some enterprises. Non-resident aliens may not own shares in a Subchapter S Corporation and no more than 75 people may possess shares in a Subchapter S Corporation. Furthermore, Subchapter S Corporations can only be owned by people or specific trusts. Each owner of an S·ubchapter S corporation has the state share of ownership, voting power, and profits and losses. A “C” Corporation or Limited. A liability Corporation would be a preferable possibility if you desire varied amounts of
ownership share or voting power. 1·f your company generates more than 25%·of its. revenue·from passive i•nvestments, the Internal Rev·enue Servic·e has the authority to revoke your Subchapter S cla·ss·ification, making a Subchapter S Corporation an unsuitable structure for real estate companies.
A “C” Corporation, like a subchapter S Corporation, restricts persona. I responsibility.
If considerable business revenue· must be moved from one year to the next, or if large fringe benefits, such as health ins r ance, are required, forming a C Corp may be acceptable.
This is due to the fact that g C Corp allows certain ad·vantages to be deducted from the corporation’s ·taxes. Employer remittances for health benefits, for example., are tax deductible for the firm even if they are not included in the employee’s total income. Other employer expenses that may be subject to the same approach include:
– accident
– disability
– life insurance
– death
– supplementary unemployment
– child care
– travel lodging and meals
– employee mass transit employee parking
The main disadvantage of a “C” Corporation is that any eafn ings or dividends distributed are subject to double taxation. Such payouts are almost certainly expected in enterprises with passive investors, and there may be superior tax planning solutions avail·able. “Ci’ Corporations are taxed at 8.84% of income. in the first year and the greater of 8.84% or $800 in subsequent years. Quarterly estimated taxes are paid.
Limited Liability Corporations
The Limited Liability Corporation (or “LLC”), like a corporate structure, will safeguard your personal assets from commercial liability. One advantage of an LLC over an S or C Corp is that there are far fewer formalities required in the management and administration of an LLC.
LLCs are a hybrid of the pass-through taxation advantages of a partnership or sole proprietorship with the risk-mitigation elements generally associated with a corporate structure. The pass-through features of an LLC enable business owners to avoid double taxes on corporate income. Because the LLC is not a separately taxed entity, both gains and losses can be carried through to the owner’s personal tax return.
Aside from the tax advantages, LLC owners have their personal assets secured in the same way that corporation owners do. In a nutshell, their re·sponsibility is restricted. Owners (technically referred to as “members”) of a Limited Liability Corporation can deduct all losses (whereas owners of Subchapter S Corporations can only deduct losses up to the amount of their investment), and members can have varying degrees of ownership share and voting power without losing pass-through taxation capability. An LLC’s owners/members might be entities such as other LLCs or
corporations.
From year to year, an LLC might be taxed as an entity or as a “pass-through” entity. At the end of the first quarter, LLCs have taxed a minimum of ‘$800 every year in the state. If the entity chooses to be regarded as a corporation, it must file Form 100 (and 100-ES) and pay corporate taxes. Although the tax·is progressive, the typical LLC tax rate is around a quarter of one per cent of revenues. Quarterly estimated taxes are paid.
Many professional services in California are not authorized to be conducted through a Limited Liability Corporation. Professionals accredited by the California Chiropractic· Act, California Business & Professions Code, or the c·alifornia Osteopathic Act are not eligible to incorporate LC under California Corporation Code 173·75-. Attorneys, physic ions, li censed contractors, CPAs and accountants, and others are among those affected.
LLCs are no:t permitted to provide · professional services” under Californi Corporation Code Section 17375. Professional ser vices are defined· as “any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the·Business arid Professions Code, the Chiropractic Act, the Osteopathic Act or the Yacht and Ship Brokers Act” in California Corporations Code Sections 13401(a) and 13401.3. If you fall into one of these categories, your best choice is to create a Limited Liability Partnership or a Professional Corporation, depending on, the specifics of your firm. Contact our office to find out which entity is ideal for your new enterprise and whether you qualify to operate as an LLC under California law.
