Should I incorporate, organize an LLC, or remain a sole proprietorship?
Q. Since I am starting a business, should I incorporate or form a limited liability company?
A. Whether to incorporate or to become a limited liability company (LLC) depends on how much you have to lose as compared to the $800 per year it costs to retain the protections offered to businesses in California. If you don’t add the layer of personal protection that comes from taking advantage of one of these business options then all your (any your spouse’s) personal wealth may be on the line in the event that your business spends more than it takes in and has to shut down or if you or an employee causes injury or damage to another. Since closing within the first 2 years of operation is the norm for the great majority of new businesses, and since stuff does happen, one must think carefully before ignoring the financial protection the law allows. This attorney has seen enough of business difficulties and business liabilities to recommend the protections that are available under California law.
Q. Well then, what will it cost to incorporate or launch a limited liability company?
A. $500 or less should do everything needed to incorporate or become an LLC, including the filing fees, the attorney fees, the seal and minute book.
Q. What is the difference between a corporation and an LLC?
A. The corporation is the old work horse of business organizations, it offers its stockholders the opportunity to invest in a business while avoiding the personal liability that comes to sole proprietors when an owner or employee of the business causes financial loss or injury to another person or business. Before corporations existed, if a business owner’s horse ran over an unsuspecting (or even a suspecting) pedestrian, the business owner could be held personally liable for that injury. On the other hand, if the horse and employee were employed by a corporation, then the corporation could be held liable, but not the stockholders. So, the stockholders only stood to lose their investment in the corporation, not their house and home.
The major drawback to incorporating, in modern times, was that the corporation was a legal person and was taxed on its profits, and then when it paid out dividends, the stockholders receiving those dividends were also taxed. Stockholders thought it unfair to have to pay the tax twice on the same income. Consequently, a different kind of taxation was made available to some corporations under sub chapter S of the Corporations Code. Accordingly, and not surprisingly, these corporations were known as sub chapter S corporations. Another obstacle to some corporations was that the bylaws were long and complicated and difficult, or at least expensive, to alter. The bylaws of corporations are set by the sovereign state of California and do not necessarily provide the organizational structure that the principals of the business want.
Enter the LLC (limited liability company). The LLC answers the difficulties presented by corporations while giving the liability protections enjoyed by stockholders in a corporation. One major difference is that an LLC is not taxed. The profits are taxed to the members (the LLC term equivalent to stockholders) as if the profits went directly into the pockets of the members. Therefore, to pay the taxes, many LLCs distribute enough of the profits to cover the taxes if they don’t distribute much more.
The other major difference is that the Operating Agreement (equivalent to the bylaws of a corporation) can be as simple and brief or as complicated as the original members wish them to be. The point is that they can be very flexible compared to the bylaws of a corporation.
Q. Wow, at $800 a year, California is an expensive place to have an LLC or corporation. I heard that Utah LLCs only cost about $20.00 a year.
A. Right you are. If you wish to incorporate or create an LLC in another state, you are welcome to do so, however, if you want to do business in California, you must register in California and pay the same amount as if you began here in the first place. If you want to pay fees in two states, be my guest.
There is lots more to know about LLCs and corporations in California. If you have questions, please feel free to contact me using the info on the panel over there ———>
Carter F. Johnston