Orange County, California Business Law Attorneys
Corporations vs. LLCs
When making important business formation decisions, an experienced legal team can provide you with the information and the strategic legal planning advocacy you need to protect your business. At Jacobs & Dodds, we have over 25 years of experience in business law and protecting the practical and financial interests of our business clients. If you are interested in business law and the practical differences between a corporation and an LLC, please consider the following:
Corporations vs. LLCs
A California limited liability company ("LLC") is a hybrid between a partnership and a corporation. An LLC combines the “pass-through” tax treatment of a partnership with the limited liability accorded shareholders in a corporation.
Shareholders and Ownership
Like a corporation, which can have as few as one shareholder, an LLC is required to have only one “member” (i.e., owner). Like limited partnerships and corporations, an LLC is recognized as a legal entity separate and apart from its “members.”
Debts and Liability
Generally speaking, only the LLC can be held responsible for the LLC's debts. Subject to certain narrow exceptions, LLC members are not personally liable for the entity's obligations and/or liabilities. Of course, LLC members may be personally liable for the LLC's obligations if they have personally guaranteed them.
Management and Member Interests
A member's voting interest in an LLC will ordinarily correspond to the member's interest in the profits of the LLC. Each member has the right to vote in proportion to such member's interest in the current profits of the LLC, unless the articles of organization or operating agreement provide otherwise. A corporation is a distinct legal entity separate and apart from its officers, directors and shareholders. As a result, a shareholder, officer or director is not the employer of those working for the corporation, nor are they considered the owner of the corporate property.
Tax Differences Between Corporations and LLCs
LLCs were created by the IRS for real estate companies and include a hidden tax. If you incorporate as an LLC, you pay extra tax to the CA Franchise Tax Board. The tax to LLCs is graduated, meaning the higher the business earnings, the higher the tax. Tax can be as high as $10K. There is no similar tax for sub-chap C or S-corps.
LLCs and Record Keeping
While there are some drawbacks to an LLC, establishing one may be a good idea if you cannot properly maintain a corporate entity. Other corporate structures will require significant record keeping, including minutes and other formal requirements. With an LLC, you will not have to maintain minutes and adhere to stringent formal requirements.
Profit Division for LLC
In an LLC, it does not matter what percentage of ownership you have. Profits can be divided in any way that the owner or owners decide.
Advantages and Disadvantages of an LLC
The advantages of an LLC include limited liability, pass-through taxation and flexible management structure (voting interests may be separated from profit interests).
The disadvantages of an LLC include greater state oversight. LLCs must be registered with the California Secretary of State and can cause confusion for those who do business with the LLC because LLCs are relatively new (this is especially true if the LLC is going to be doing business with individuals or companies overseas).
Contact Jacobs & Dodds for a free consultation with an experienced business law and transactions attorney or to speak with an experienced Orange County, California, trial lawyer from our firm.
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