Deciding on the right type of business entity to form your California company is important to protect your personal assets and optimize tax savings. The wrong type of business entity can expose you to personal liability, have unnecessarily burdensome filing requirements, and make raising capital more difficult. Talk to an experienced business lawyer about the best entity form for your company to help your business thrive into the future.
There are a number of business entity types in California. The type of business may affect how the company and business owners are treated by the IRS, California Secretary of State (SOS), and other state and federal agencies. California business entities can include:
One of the most important concerns for a new company should be limiting personal liability. One of the simplest business entity types is a sole proprietorship. However, a sole proprietorship also provides the least protection for small business owners. An accident or change in the market can result in putting your personal assets at risk. For example, if a customer sues the business for causing an injury, the customer could go after the owner’s personal property, including bank accounts and family home.
In a limited liability company, the business owner is legally distinct from the business and liability of the company generally does not extend to the owner’s personal assets. LLCs can generally take advantage of this liability protection like a corporation. Talk to your Bakersfield business entity formation attorney about whether limiting liability is important for your California company.
Another important factor in selecting your California business entity type is how the company and owners will be taxed. Tax rates can vary based on the industry, county, city, where the company does business, and company income. Companies in California can be subject to a corporate income tax, franchise tax, franchise tax flat fee, or alternative minimum tax (AMT).
C corporations are subject to double taxation. The company is taxed at the corporate level and shareholders are taxed personally when company profits or dividends are paid out.
Pass through taxation can be advantageous for other business owners where profits, losses, and expenses pass through to the business owners. This applies to sole proprietorships and partnerships. An S corporation is generally a pass-through tax entity. LLCs can generally decide whether to be taxed like a C corporation, or S corporation.
When a company wants to sell public shares in the future, a C corporation or S corporation is generally the best option. A corporation can sell stock to raise capital, which can be necessary to help your company continue to grow through making necessary investments in the business. A general corporation may also be more attractive to investors who want to invest in the company or buy the company in the future.
Corporations generally have stricter filing and reporting requirements. Corporations in California are required to maintain strict formalities to operate. This includes filing articles of incorporation, specifying directors and agents, keep bylaws, maintain minutes of meetings, filing annual reports and taxes, and maintaining company records. If the company is ever dissolved, the corporation must also follow the formal dissolution process. Failure to abide by the corporate formalities can expose the officers or directors to personal liability.
After forming your company, there may come a time where the business could benefit from an alternative form of business. For example, a corporation may have changed and the shareholders want to change to an LLC. A statutory conversion in California will allow a corporation to convert to an LLC through transferring assets and liabilities to a new LLC.
An experienced California business attorney will be able to advise you on the benefits and drawbacks of various entity types, how they will affect your business now and in the future, and prepare the documents to protect your personal and business investments to help your company grow.
California can be a tough climate for companies and the tax and business laws are continually changing. It is important to have someone on your side to keep you up to date on the latest changes in state and federal law and help you prepare for any coming changes that will impact your business.
At Zimmer & Melton LLP, we understand the unique challenges facing new companies in Bakersfield and throughout Kern County. We have helped many entrepreneurs, family businesses, and ventures get their businesses up and running. Contact our office in Bakersfield with any questions about entity formation in California.
