September 3, 2017

California LLC or Corporation?Which?

As a business and corporate attorney here in California, one of the most common questions put to me is whether a new business should constitute itself as a California LLC or a California Corporation. Each of these entities has its own set of pros and cons. Which is best for you will depend on the nature of your business, how many owners there are, whether there are outside investors, the tax implications, and other considerations.

A California LLC offers the following advantages:

  • Fewer formalities.
    • Unlike California Corporations, LLCs are not required to have a board of directors, are not required to have bylaws, do not have to have shareholders meetings or board of director meetings, and are not required to keep meeting minutes.
    • LLCs are only required to have an operating agreement which does not need to be filed with the California Secretary of State.
  • No double taxation.
    • A California LLC only has to pay the $800 a year minimum franchise tax; there is no federal tax.
    • LLC income is passed through to the LLC?s members and the members are only taxed on an individual level.

A California LLC has some disadvantages as well:

  • Unable to issue stock.
    • LLCs cannot issue shares of stock. Thus, it may be difficult to attract investors if you are a startup. Venture capital firms often invest in startups in exchange for shares in the company.
    • The inability to issue stock also makes it more difficult for a LLC to raise capital.
  • Professional services providers excluded.
    • Under California law, accountants, lawyers, chiropractors, and other types of professional service businesses cannot operate as a LLC. They must form a corporation of a partnership.

Conversely, California Corporations offer the following advantages:

  • Ability to issue stock.
    • The main advantage is that a corporation in California is easily able to have outside investors issuing shares to these investors. This allows the corporation to raise capital for itself.
  • Can use a fiscal year calendar.
    • Corporations in California are allowed to use either a calendar year or a fiscal year for accounting purposes (a California LLC will generally have to use a calendar year).

Some disadvantages of forming a corporation in California include:

  • Double taxation.
    • Corporations are taxed twice, once at the corporate level and again at the individual level when the profits are distributed to its shareholders.
  • Strict corporate formalities.
    • Unlike LLCs, corporations have strict formality requirements. They must have a board of directors, hold regular meetings of shareholders and directors, keep meeting minutes, file annual reports, and issue their shares properly.
    • Due to the higher level of corporate formalities, it is often easier to pierce the corporate veil and hold a shareholder or owner of a corporation personally liable than it is to pierce the corporate veil of an LLC.

These are just some of the considerations that need to be explored when deciding which corporate structure is best for your purposes here in California. Feel free to consult with us, we have the knowledge and experience to guide you to the business structure that best suits your needs. The initial consultation is free.

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