Should I Form a Corporation or a Limited Liability Company?

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What is a Corporation?

A corporation is a separate legal entity controlled by the shareholders of the corporation.   Shareholders nominate and select officers, such as CEO, CFO and Treasurer, to run the corporation.  A corporation must follow corporate formalities by holding annual meetings, keeping minutes and recording all share transfer transations.  More information on how to satisfy corporate formalities, see my previous blog entry  http://www.regallawoffice.com/blog/2011/02/16/safeguard-your-personal-assets-from-your-business-liabilities/.

A corporation can be formed by filing a document called the Articles of Incorporation with the California Secretary of State.  A corporation can file IRS Form 2553 to become an s-corporation which allows the corporation to pass its income, losses, deductions and credit through to its shareholders for federal tax purposes.  For a s-corporation, the shareholders report the corporation’s income and losses on their personal tax returns and are taxed at their individual income tax rates.  A corporation that does not file IRS Form 2553 is called a c-corporation and it is subject to taxation at both the corporate and individual level (double taxation).

What is a Limited Liability Company (LLC)?

A LLC is a hybrid business entity that combines the characteristics of both a corporation and a partnership.  In California, a LLC can be formed by filing a document called the Articles of Organization with the Secretary of State.  A LLC is controlled by the LLC’s members and a set of rules called bylaws.  Similar to the protection afforded to the shareholders of a corporation, the personal assets of the members of a LLC are protected from liabilities incurred by the LLC.  However, there are three main advantages in forming a LLC instead of a corporation.  A LLC is not required to follow the same formalities as a corporation as there are no requirements of annual meetings, minutes and shareholder notifications.  There are also fewer restrictions about who can be a member because a LLC can be owned by individuals and business entities.  Lastly, whereas a corporation has to file IRS Form 2553 to avoid double taxation, a LLC can elect whether it will be taxed as a corporation or a partnership (similar to a S-corp).  One drawback is that a LLC is not permitted to provide any services which require a state professional license such as those belonging to doctors, lawyers or pharmacists. 

If you need help forming or maintaining a business entity, we can help.  You can contact us at 1-866-644-8011 or fill out our contact form.

****The opinion above is not intended to be legal advice and does not create any attorney-client relationship between its author and the readers.  Please consult an attorney for information or advice specific to your legal issue. ****

Regal Law Office

21151 S. Western Ave. Suite 263A

Torrance, CA 90501

1-866-644-8011

Posted in: Business Litigation, Civil Litigation, Law, Uncategorized