Answering the most common business law questions to help you gt down to business.
What is a Corporation?
A corporation is often times referred to as a "legal person." This is because a corporation is its own legal entity that is separate and distinct from its shareholders (owners). Corporations enjoy most of the rights and responsibilities that an individual possesses, including, but not limited to, taxes; however, a corporation will shelter it's owners and employees from certain risks that an individual cannot always protect against.
What is a General Partnership?
A general partnership consists of two or more persons who agree to go into business with one another and share in the profits and losses. These people are called partners. By default, partners share in profits, losses and responsibilities in managing the business equally. In a general partnership, each general partner assumes full personal liability for the debts and obligations of the partnership.
What is a Limited Partnership?
A limited partnership consists of two or more persons who agree to go into business with one another and share in the profits and losses. A limited partnership differs from a general partnership in that it has at least one general partner and at least one limited partner. The general partner is often involved in the day-to-day operations in one way or another, while the limited partner typically only injects capital into the partnership to allow it operate. Similar to the general partnership, each general partner assumes full personal liability for the debts and obligations of the partnership. However, the limited partner’s liability is limited to their capital investment in the business.
In order to form a limited partnership in California, a certificate of limited partnership must be filed with the California Secretary of State. A limited partnership formed in another state, that does business in California must register with the California Secretary of State prior to conducting business in California.
What is an LLC?
An LLC or Limited Liability Company is a business entity that combines the elements of a partnership and corporation. An LLC owners (members) liability for debts and obligations of the LLC is limited to their capital investment, which means, properly capitalized and operated, an LLC will protect its members from events occurring inside the LLC. In California, certain types professional services businesses (those requiring a state professional license) cannot form an LLC.
As for taxes, all profits and losses "flow through" to LLC members, meaning there is not separate and distinct tax for LLCs. With this "flow-through" taxation, California treats LLCs like partnerships for income tax purposes if it has more than one owner. If there is only one member of the LLC (SMLLC), California will treat it as a "disregarded entity," which means it will be taxed as though it were a sole-proprietorship. This member will want to file a Schedule C for income taxes. A disregarded entity is considered the same entity as the owner for tax purposes, but not for liability purposes.
An LLC is allowed to elect to be 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 this election.
What is a Sole Proprietorship?
A sole proprietorship consists of one individual that is running a business. It is the simplest way to form a new business. This is because there are no formalities required by the state as a sole proprietorship does not have an existence that is separate from its owner. When ownership of the business is divided amongst more than one person, a partnership is created by default.
Do I need a business entity?
It depends. If you're the only person involved in running your business and providing capital, them you may want to stick with a sole proprietorship as there are no formal requirements. Moreover, any debts and obligations of the business will ultimately fall on your shoulders as you are the sole operator even if an LLC were formed. While there are some advantages to creating a corporation and electing under federal law to be taxed under Subchapter S, the advantages may not outweigh the costs. If there a two or more people involved, you may want to consider forming a separate entity to limit liability of owners or members to capital investments.
How do I know whether a Corporation, Partnership or LLC is right for my business?
This is a complicated question as there are many legal and monetary considerations that govern which entity, if any, is right for you. The best way to determine which entity is right for you is to read up on their pros and cons, and then discuss your business with a liccensed professional.
What are self-employment taxes?
Self-employment taxes consist of Social Security and Medicare taxes primarily for individuals who work for themselves. These are the same taxes employers withhold from your paycheck. If you own your business, these taxes are your responsibility and must be paid if either your net earnings from self-employment (excluding church employee income) are $400 or more or you had church employee income of $108.28 or more. Generally, your net earnings from self-employment are subject to the self-employment tax.
How do I set up a California Corporation?
There numerours steps to set up a California corporation. They are generally, the following:
• Select a name for your Company.
• Create and File Articles of Incorporation (“AOI”) with the Secretary of State.
• File IRS Form 2553 (S-Corp Election) if you decide to be taxed under Subchapter S.
• Create an Incorporator’s Organizational Action.
• Create Bylaws (which will be adopted in the Incorporator’s Organizational Action).
• Create Stock Certificates.
• Obtain business licensing and insurance.
• File a Statement of Information annually.
Depending on the situation, you may need to take it another step further. Other things you might need to do include the following:
• Obtain a Fictitious Business Name.
• Create a Stock Purchase Agreement.
• Create an Intellectual Property Assignment Agreement to ensure Founders assign relevant IP to the Company.
• Record any assigned patents and trademarks with the United States Patent and Trademark Office.
• Create a Confidential Information & Invention Assignment Agreement.
• Create and file a state Securities Exemption Notice (25102(f) in California).
• File a 83(b) Election for vesting stock within 30 days of stock purchase.
• Create an Indemnification Agreement for Officers and Directors.
How do I set up a California Partnership?
Choose a business name that does not infringe on any other business’ name. File a Fictitious Business Name statement with the county clerk if needed. Draft and execute a Partnership Agreement. Obtain licenses, permits, and zoning clearances. Obtain an Employer Identification Number.
How do I set up a California LLC?
Choose an LLC name that does not infringe on any other business’ name. File a Fictitious Business Name statement with the county clerk if needed. File Articles of Organization. Draft and execute an LLC Operating Agreement. Obtain licenses, permits, and zoning clearances. Obtain an Employer Identification Number. Observe formalities to ensure you hold on to limited liability.
What is a Subchapter S Corporation?
A Subschapter S corporation is a corporation that elects under federal law to be taxed under Subchapter S. Once this election is made, California treats the corporation as a Subchapter S corporation for state income tax purposes. An S corporation offers liability protection to its owners (shareholders). Liability of the for debts and obligations of the business depends on what type of entity the S corporation is (corporation, partnership, or LLC).
An S corporation also enjoys "flow-through" taxation wherein the profits or losses of the S corporation flow through to the shareholders. Therefore, an S corporation does not have to pay a "corporate tax" as a C corporation would. Business that are eligible to make a Subchapter S election include having no more than 75 shareholders and consisting of shareholders that are individuals, estates, certain trusts and partnerships, tax-exempt charitable organizations, and other S corporations (but only if the other S corporation is the sole shareholder).
What is an EIN and do I need one?
An Employer Identification Number (EIN) is a Federal Tax Identification Number, and is like a business entity's social security number. Generally, businesses need an EIN. You need an EIN if you have employees; you operate your business as a corporation or a partnership; you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms; you withhold taxes on income, other than wages, paid to a non-resident alien; you have a Keogh plan; you are involved with any of the following types of organizations: Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns, Estates, Real estate mortgage investment conduits, Non-profit organizations, Farmers' cooperatives or Plan administrators.
How do I dissolve a California Corporation?
If you want to dissolve your corporation, check the applicable Final Return box on the first page of your current year tax return, and write "final" across the top. After you file your return, be sure not to conduct any business in California once the tax year is has ended.
If you are registered with the California Secretary of State, you must also file the appropriate dissolution, surrender, or cancellation forms within 12 months of filing your final tax return.
What is the California LLC Tax?
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. This the LLC does not pay income tax; its member are responsbile for taxes. However, LLCs are required to pay the $800 annual tax and a fee, which is commonly referred to as the LLC tax.
What is a Pre-Incorporation Agreement?
Pre-Incorporation Agreements (or Pre-Incorporation Contracts) establish the operations, management, and define who will have control prior to the initial corporate meeting. A pre-incorporation agreement is entered into by corporate promoters, who form the company by filing its Articles of Incorporation. Since the corporation has not been formed yet, it cannot be a party to the agreement. If the corporation is not formed or if it fails to adopt the agreement, the promoters can be held personally liable for any breach of the agreement.
Disclaimer: This web page is a resource for educational and informational purposes only and should not take the place of hiring an attorney. Using this web page does not create an Attorney-Client relationship between you and Schlau|Rogers. Individually-tailored legal advice is not provided within this web page. Instead, this web page is designed to make you aware of various legal issues. Your use of this resource is subject to our Terms and Conditions, which you can read here.
RELATED BUSINESS LAW INSIGHTS
Don't see your question? Ask us.
© SCHLAU|ROGERS is a California based estate planning and business law firm, serving Laguna Beach, along with all of Orange, San Diego, Riverside, and Los Angeles counties. All rights reserved.