Should I Form a California Corporation or Incorporate my Business?
|Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Written: March 2009
To decide whether or not to incorporate your business, you have to think about why you want to incorporate a business.
Some people want to incorporate their businesses because of the perceived liability protection. Incorporating your business, or forming a limited liability company, can create a “corporate shield” which will protect you from legal responsibility and personal liability for business debts and obligations. If a business related problem results in a non-guaranteed debt, or judgment, your corporation or LLC will be at risk, but your personal assets will be protected. That is so long as you followed the corporate formalities and properly set-up and maintained your corporation, or LLC. The truth is – over 90% of all California corporations and LLCs are not properly formed, or maintained, and consequently have lost their "corporate shield."
If you have substantial assets outside of an IRA or a 401k, then incorporating a young business may be a good idea. If you have a tremendous fear of liability, or if the business you will be engaging in has a high amount of risk, you may also want to incorporate since a personal judgment can be collected for up to 20 years.
Some people want to incorporate because of the prestige. In some industries, suppliers and customers prefer to deal with an INC or an LLC, and look down on businesses with a simple DBA. If you are planning to do business with a government agency, they almost always insist your business be incorporated, or a limited liability company.
Others want to incorporate a business because of the supposed tax advantages. If you are earning in excess of $60,000 a year then there may be some tax advantages, but often times the owners of a California corporation or LLC fail to take advantage of the tax savings either because they failed to call their accountant on time, or because they simply don't have any extra money to put away.
The downsides to incorporating (forming a California corporation or LLC) are mostly monetary:
- The proper formation of a California corporation will require the retention of an attorney. Although the cost to form a corporation, or LLC, averages $2,500 we only charge $1,280+Costs for a California corporation and $899+Costs for a single member LLC. You can use an online service or accountant for about $800, but we strongly advise against it because they will NOT complete and file all of the documents required in California. In fact, most don't even know that all corporations and limited liability companies are required to file a notice with the Commissioner of Corporations within two weeks of issuing shares.
- Both a California corporation and an LLC are required to pay a minimum franchise tax of $800 per year. The minimum franchise tax is waived for the first year of a California corporation's existence, but not for a California LLC. For a California LLC, the $800 franchise tax must be paid within 4 months of filing the Articles of Organization.
- Your taxes will become more complicated and may require an additional tax return and the assistance of an accountant or CPA.
Usually, the question for most small businesses is not whether or not to incorporate, but whether to form a California corporation, or a California LLC. You can read more, by clicking on the links under "Related Articles" but the truth is determining whether you should incorporate and whether you should form a California S corporation, or LLC, really depends on your particular facts and circumstances. If self-employment tax is killing you, then a California S corporation may be best, but if you don't want to notice, hold and document annual and special meetings of the shareholders and directors and follow the other corporate formalities, then you may be better off with a California LLC despite the franchise tax on "gross revenues". Honestly, it is best to get input from an experienced California business attorney because making the wrong decision can result in significant monetary losses.
If you would like a Los Angeles, California business law attorney with 15+ years of experience to answer your questions, or to discuss whether a sole proprietorship, corporation, or LLC would best serve your needs, Ms. Marsh provides a low cost telephone consultation for as little as $85. You can schedule a telephone consultation by completing her Telephone Consultation Request Form and Melissa Marsh will promptly call you back at the time you select.
On one further note, please do not form either a California LLC or a Corporation without the assistance of a licensed California business attorney. I do not care if you select me as your counsel, or another corporate lawyer. More and more I am seeing people in my office who have had their LLC, or corporation, formed by their accountant (who should stick to tax matters, not legal ones), or by a low cost online service company. Unfortunately those instant savings typically turn into huge economic losses because it always costs more to fix a problem than it does to prevent one in the first place. When these short cuts are taken, the owners often find out the hard way that their entity selection either was a costly tax mistake, or didn't provide the limited liability protection they thought they were getting. An LLC, like a corporation, only protects its owner's personal assets IF it is properly formed, properly funded, and properly maintained. If you cannot afford to have an attorney form your California corporation or LLC, then start off as a sole proprietorship with a fictitious business name and tax identification number (EIN), or as a partnership with a simple partnership agreement.
Ms. Marsh also provides various low cost In House Counsel Plans designed specifically for the small business owner.
California business lawyer, Melissa C. Marsh, is based in Sherman Oaks and West Hollywood, and serves individuals and businesses throughout Los Angeles County, including: West Hollywood, Miracle Mile, Beverly Hills, Century City, Santa Monica, Burbank, North Hollywood, Valley Village, Toluca Lake, Studio City, Sherman Oaks, Van Nuys, Encino, and Woodland Hills.
© 2009 Melissa C. Marsh. All Rights Reserved.