The most common decision for small-scale founders is whether to establish an LLC or a company with "election". Both entities have many similarities, including protection of limited liability of personal property against litigation and debt. However, there are some differences, especially with respect to taxation. s There are many information on companies and LLC in general, but it is rarely to decompose important differences. Below we summarize the key features and problems related to each entity.
I.S Corporation
A. Liability
1. Shareholders are subject to personal protection from business obligations and liabilities (such as c-corp and LLC)
B. Taxation
1. Passthrough: Gains and losses are passed through companies and reported to shareholders' personal income tax refund (same as partnership and LLC)
2. Self Employment Taxation System: Profits to shareholders of S - Corp are not subject to self - employment tax (approximately 15% of social security and Medicare). Rather, self-employment is taxed only on parts classified as "reasonable salary". LLC and individual business owners need to pay self-employed taxes for all incomes. The ability to minimize self-employment tax is considered one of the biggest benefits of an enterprise.
3. Corporate loss: The loss of corporate income can be deducted from the personal income tax at the shareholders meeting which prevents countervailing of other income sources such as W-2 income.
Franchise tax: The franchise tax will be exempt from your first year. On the other hand, LLC needs to pay the franchise tax for the first year. S - Corp must pay the CA franchise tax authority 1.5% tax on net CA income or a higher tax rate of $ 800.
5. Distribution of profits and loss: There are no special dividends for shareholders. Corporate profits and losses must be divided in proportion to the share of the shares owned by each shareholder. On the other hand, LLC considers flexibility as to how to divide profits and losses.
C. Form
1. An annual income tax return for S Corporate must be submitted every year (IRS Form 1120 S)
2. An annual report must be submitted to the Secretary of State and a reporting fee of 25 dollars and an information statement are required at 90 days after creation.
3. Maintain corporate procedures such as by-laws, minutes of minutes, annual general meetings, issue of shares, keeping banknotes on track of financial transactions between companies and shareholders, avoiding corporate veil penetration.
D. Other characteristics
1. Shareholders of 100 or fewer
2. Shareholders must be US citizens.
3. Shareholders must be individuals (not companies or partnerships)
4. Only one type of stock (provided, however, that the type of voting rights is different, but the right concerning the sale of dividends and assets)
5. Owner is called "shareholder"
II. LLC
A. Liabilities: Shareholders who have been personally protected from business obligations and liabilities (such as s and c - corp)
B. Taxation
1. Passthrough: Profits and losses pass through LLC and are reported to shareholder's personal income tax (same as partnership and association)
2. Self Employment Taxes: LLC members are required to pay self-employed taxes for all incomes from LLC.
3. Loss on LLC: LLC's losses can be deducted from individual tax returns of members and can offset other income sources such as W-2 income.
4. Franchise Tax: You need to pay the minimum annual tax of $ 800 for the first year, 75 days after formation and every year thereafter. If the total compensation exceeds $ 250,000, the annual franchise tax will increase. Please refer to http://www.ftb.ca.gov/forms/06 _forms/06 _ 3522.pdf.
5. Distribution of profit and loss: LLC has flexibility as it can determine the share of profit and loss of LLC received by each owner.
C. Form
1. There is almost no procedure required. Business consultation is recommended and no annual meeting is necessary.
2. Reporting fee $ 25 and description of information are required 90 days after formation and every 2 years.
D. Other characteristics
1. Professionals licensed in California state will use professional
2. Owner is called "member"
3. The member may be an individual or an independent corporation such as a corporation.
4. Members' investment will gain ownership in proportion.
Percent ownership determines how the profit and loss will be split.
© 2006 Michael N. Cohen, Esq.
This article is not intended as a substitute for legal advice. The specific facts that apply to your problem may give different results than what you expect. Please consult a lawyer familiar with the problem and law.
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