Business Entity Forms – Part II: C Corp, S Corp, LLC, Series LLC

C CORPORATION

A corporation is a legal entity that is owned by its shareholders (owners). Since it’s an entity separate from its shareholders, the owners are shielded from personal liability for the debts and obligations of the corporation. C Corporation is the most common form. C Corp is taxed under Internal Revenue Code, Subtitle A, Chapter 1, Subchapter C, unless it chooses to be taxed under Subchapter S. C Corps are subject to double taxation: first, C Corp itself is taxed annually on its earnings; and second, the shareholders are taxed when they receive these earnings as dividends. A California C Corp is taxed on its net income at a rate of 8.84 percent; it is also subject to a minimum annual franchise tax of $800. The estimated annual tax must be paid in four installments.

C Corp. must adhere to certain formalities in order not to lose its corporate status and protections. For example, it must create bylaws that regulate shareholder meetings, define the scope of directors’ authority, etc.

Pros:

– Generally, no personal liability.

– Ownership can be transferred easily through the sale of stock.

– Corporation survives owners’ death.

– Owners can issue and sell stock to investors to raise capital.

Cons:

– More costly to set up and maintain than a sole proprietorship or a partnership.

– Possible double taxation.

– Ongoing filing and reporting requirements.

S CORPORATION

An S Corp is a regular corporation or any business entity, (i.e. a partnership or LLC that chooses to be taxable as a corporation), that elects to be taxed under Subchapter S of the federal tax code. S Corp is not taxed at the entity level, and profits flow directly to the owners. California S Corp is taxed on its net income at a rate of 1.5 percent. The estimated annual tax must be paid in four installments.

Pros:

– Avoid double taxation.

– Generally, no personal liability.

– Generally, survives its owners’ death.

Cons:

– Can have no more than one class of stock.

– Ongoing filing and reporting requirements.

– One hundred shareholders max.

LIMITED LIABILITY COMPANY (LLC)

LLC combines the favorable tax treatment of partnership with the corporate shield from personal liability. LLC owners’ liability for debts and obligations of the LLC is limited to their financial investment, yet the members have the right to participate in management of the company like general partners.

In California, for income tax purposes, an LLC with more than one member is taxed as a partnership, and an LLC with a single individual member is taxed as a sole proprietorship. LLC may instead to choose to be taxed as a corporation by filing an election on a Form 8832 with the IRS. California taxes the LLC and its owners in the same manner the IRS does, in addition to the $800 minimum annual tax for the privilege of doing business in the state. An LLC, whether California or foreign, may not render professional services.

Pros:

– Easier and faster to form than a corporation.

– Generally, no personal liability.

– No double taxation.

– One of the least burdensome corporate filing requirements.

Cons:

– More complicated to form than other forms of partnerships and sole proprietorships.

– Ownership may be harder to transfer since the LLCs do not issue stock.

SERIES LIMITED LIABILITY COMPANY (SERIES LLLC)

Series LLC is one of the newest corporate forms for master LLCs that have subsidiaries that operate as independent LLCs, each being protected from liability for the actions of other LLCs. Series LLC cannot be formed in California, but a Series LLC formed in another state may register with the California Secretary of State and conduct business in California. Both Delaware and Nevada permit formation of Series LLCs.

Pros:

– Each unit may be managed independently of others.

– Each unit has own assets and liabilities.

– Each unit is protected from liability for the wrongdoings of other units.

– The owners enjoy personal liability protection.

– Each unit may be in the same business as a master LLC or conduct its own type of business.

– Units may be formed and dissolved by simple amendments to the Operating Agreement, without filing with the state. Therefore, reduced legal, accounting and administrative fees that would otherwise be incurred by multiple unconnected LLCs.

Cons:

– Each unit must maintain separate records.

– Since Series LLC is a new entity, its tax status is unsettled and case law underdeveloped in some states. The IRS has not stated whether each unit to be taxed as a separate entity.