San Diego Corporate Formation Lawyer
When starting a business, there are various different legal entities that you can form. You may wish to hold your business as a sole proprietorship, a partnership, a limited liability company, a limited liability partnership, or a corporation. Each of these difference types of business entities have different business formation procedures. It is important to consult with a San Diego corporate formation lawyer in order to choose the right business entity for your specific circumstances.
Also, each different type of business entity has different effects on taxes, legal liability and your ability to raise capital. Federal and state law have different rules that apply to each type of entity. Moreover, since each state has its own business laws, there may be benefits or disadvantages to incorporating in one state over another.
It may be difficult and costly to change business entity form at a later date, so it’s important to get it right the first time. This is why you should consult with experienced business law attorneys.
C corporations are the most common type of corporations. The overwhelming majority of medium to large size businesses are C corporations. A C-corp can have an unlimited number of shareholders. This makes a C-corp very attractive to investors and also simpler for issuing stock awards to employees.
However, the profits of C-corps are subject to corporate income tax. Additionally, when distributions of corporate profits are made to shareholders, the shareholders have to pay personal income tax on such distributions. Many refer to this conundrum as “double taxation.” If you want to form a C-corp, the corporate formation attorneys at Thorsen Legal can assist you with advising on corporate structure, drafting and filing articles of incorporation, creating bylaws, issuing stock and other corporate formation related activities.
If a corporation is properly formed and corporate formalities are complied with, conducting your business as a C-corp should protect your shareholders from personal liability for corporate actions. This includes having regular board meetings and shareholder meetings and keeping detailed meeting minutes of both. Let the business formation lawyers at Thorsen Legal guide you in forming a C-corp and complying with corporate formalities.
To avoid the “double taxation” issue faced by C-corps, some business owners file an C-corp election. S-corporations are basically C-corporations that have elected to be taxed as a partnership. This does not require a separate type of formation. Rather, after they are formed, eligible domestic corporations make an election to be taxed as an C-corp.
S-corps are sometimes referred to as closely held corporations. This is because, unlike a C-corp, an S-corp is limited in the number of shareholders it can have. Because of this, S-corporation elections are generally used by small businesses.
An S-corp is considered a “pass through entity.” This means that the corporate profits are not subject to corporate tax, but rather the profits “flow through” to the shareholders to avoid the double taxation problem.
While the tax benefits may be sufficient for a small corporation to elect to be treated as a S-corp, the limitations of ownership may make it difficult to attract capital investment or raise rounds of financing. If you need assistance filing an S-corp election, the San Diego corporate formation attorneys at Thorsen Legal can help.
Limited Liability Companies (LLCs)
Limited liability companies or LLCs are an alternative to forming a corporation. In an LLC, membership interests rather than stock are issued.
LLCs are said to combine the best features of corporations and partnerships. LLCs are not subject to double taxation like corporations. In an LLC, the profits and losses flow through to the members, like a partnership. Also, there is no limitation on the number of members that an LLC can have, unlike an S-corp. LLC profits are treated as self-employment income and may be subjected to self-employment taxes.
One disadvantage of an LLC is that investors will often avoid them. This is because in an LLC each of the members get K-1s and investors have to wait to get these forms in order to file their personal taxes.
Another disadvantage is the limited life of an LLC. In many states, if a member dies or withdraws, the LLC ceases to exist, whereas a corporation is unaffected by this. Also the membership structures of LLCs can cause confusion about the roles and responsibilities of each member for the operation of the business.
The disadvantages of an LLC can often times be mitigated or eliminated entirely by drafting an Operating Agreement. An Operating Agreement is a legal document in which the members of a limited liability company agree to abide by certain rules and regulations.
The terms of an Operating Agreement generally include how profits and losses are distributed, how voting works, the rights of the members, restrictions on transfers, who has authority to manage the business operations of the LLC and what happens when the LLC dissolves.
Because Operating Agreements are generally more complex than business bylaws, the initial cost of forming an LLC are generally more than the cost of forming a C-corp.
Lastly, not every business can operate as an LLC. For example, banking and insurance industries are often prohibited from operating as an LLC. Furthermore, some states, such as California, prohibit licensed professionals, such as accountants, architects, doctors and lawyers from forming an LLC (although some states allow for a special professional limited liability company (PLLC) designation). Speak to a business formation attorney at Thorsen Legal to find out if an LLC is right for you.
Limited Liability Partnership (LLPs)
Limited liability partnerships are very similar to LLCs. They offer many of the same benefits and have many of the same disadvantages. The biggest difference between an LLC and an LLP is that an LLP must have at least one managing partner that is liable for the actions of the partnership. So long as the other partners do not assume a managerial role, they receive liability protection.
Professional businesses, such as lawyers and doctors, often organize as LLPs. If you plan to operate in multiple states, an LLP might not work since not all states allow LLPs. Speak to a business formation attorney at Thorsen Legal to determine if an LLP is right for your business.
Let a San Diego Corporate Formation Lawyer Form Your Legal Entity
Without a properly formed business entity in place, you can be personally liable for the debts and liabilities of your business. Choosing the right business entity and formally registering the entity with the proper government officials can help limit your liability. Your business is your baby. Make sure that it is formed right. Contract the San Diego incorporation lawyers at Thorsen Legal today at (512) 761-5197 for a free consultation.