The Difference Between a Corporation and LLC in California

Business structures have important differences that can be both advantages and disadvantages, depending on your company’s unique needs. Not all structures are created equal. Understanding the differences between two of the most widely used structures—corporations and LLCs—can help you decide which option will work best for you.

Business Structure Basics

When deciding which business structure is right for your business, the most important factors usually boils down to three things: 1) taxes, 2) asset protection or limited liability, and 3) filing requirements. An examination of these factors in the context of each structure is a vital part of the decision-making process.

Key Attributes of Corporations

There are two types of corporations—an S-corporation and a C-corporation. When most people think of a corporation, the traditional C-corp comes to mind first. Corporations can have far more shareholders than LLCs can have members, which is important for large companies or businesses that are wanting or considering “going public.”

Taxes. Corporations are taxed as a separate legal entity from its owners, directors, and shareholders. However, in an S-corporation, taxes are treated differently. An S-corporation is considered a “pass through” entity, which means there is no separate tax rate and each shareholder reports the corporation’s income on his or her own tax return. A C-corp, on the other hand, will have its own tax rate and tax filing requirements.

Asset Protection. Corporations offer outstanding asset protection to its shareholders. However, following corporate formalities to maintain that the business is a separate entity from those who operate it is essential. Failing this, creditors can make individuals personally liable for the corporation’s debts and obligations.

Filing Requirements. Corporations have the most demanding filing requirements of any business entity. In California, you must file Articles of Incorporation. You must also hold meetings of the Board of Directors and the Shareholders at least once per year. Certain capitalization requirements must also be met. Meeting all of the requirements can be challenging, and it may require the services of an experienced business attorney.

Key Attributes of Limited Liability Companies

Limited liability companies (LLCs) are far more flexible than corporations. They work well for closely-held businesses and family-based companies. Instead of having shareholders, LLCs have members, and members can choose how to manage their business, instead of being legally required to have a Board of Directors, for example.

Taxes. LLCs are considered “check the box” entities. This means that they can choose how they would like the company to be taxed. The default for the IRS’s purposes is that the LLC will be taxed as a “disregarded entity,” which means tax treatment will be like a sole proprietorship or partnership, depending on how many members are part of the LLC.

Asset Protection. LLCs also offer great asset protection in most circumstances. Like a corporation, it is important to keep personal assets separate from the company. Single member LLCs may not provide as much protection as multi-member LLCs. An experienced business attorney can help you address these potential asset protection concerns.

Filing Requirements. Once you meet the initial filing requirements to form your LLC, there are far fewer additional requirements in California compared to corporations. For this reason, LLCs are often easier and more cost-effective to maintain.

Choosing the right business structure can be difficult, but Integrated General Counsel, P.C. can help. Contact us today to set up an appointment.

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