You hear so much about corporations and LLCs but do you know when you should have one, and what are the similarities and differences between these under California Law?

When Should You Have A Corporation Or LLC:
The answer is when you need to protect your personal assets from business debts. So if you have a home, investments and other assets but are running your business as a Sole Proprietorship or a Partnership, you are risking that any creditors of the business will come after your personal assets. This is when you need to restructure your business as a Corporation or LLC.
You do not need to do this if you are just starting a business, have no personal assets or a home.

The Similarities
• Limited liability protection. With both, owners are typically not personally responsible for business debts and liabilities.
• Separate entities. Both are separate legal entities created by a state filing. 
• Pass-through taxation. Both can be pass-through tax entities, meaning no income taxes are paid at the business level. Business profit or loss is passed-through to owners’ personal tax returns. Any necessary tax is reported and paid at the individual level. 
• Ongoing state requirements. Both are subject to state-mandated formalities, such as filing annual reports and paying the necessary fees.

Differences in ownership and formalities
Ownership. The IRS restricts S corporation ownership, but not that of limited liability companies. IRS restrictions include the following:
• LLCs can have an unlimited number of members; S corps can have no more than 100 shareholders (owners).
• Non-U.S. citizens/residents can be members of LLCs; S corps may not have non-U.S. citizens/residents as shareholders.
• S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. This is not the case for LLCs.
• LLCs are allowed to have subsidiaries without restriction.

Ongoing Formalities. S corporations face more extensive internal formalities. LLCs are recommended, but not required, to follow internal formalities. Check with an attorney as to what formalities are needed for each.There are also differences in management, existence, transferability of ownership and self- employment taxes.

The preceding is a summary of legal subjects provided for informational purposes only. Most legal issues need complex factual and legal analysis. You are advised not to rely on these blogs and seek legal advice about your specific issues from a licensed attorney in your jurisdiction. Nothing in these writings is intended to create, or creates, an attorney-client relationship. For consultation with a licensed attorney you may contact Ghassemian Law Group at 949-436-2785.