ENTITY FORMATION: CORPS-LLCS
Rosenthal & Marsh, LLP helps entrepreneurs choose the appropriate business entity for starting a business, including limited liability company (LLC), limited liability partnership (LLP), C-corp, S-corp or other entities.
We also assist existing companies with restructuring for reasons related to tax, business succession, growth, and elimination or addition of partners and investors. When businesses are dissolving, we assist the owners to handle shareholder issues and liquidation and transfer of assets.
We have formed numerous California corporations, limited liability companies and limited partnerships, and have negotiated agreements by and among founders and investors. We regularly advise entities and management on their fiduciary duties to minority equity holders and creditors, and on a whole host of other corporate, securities and related legal issues that arise in the normal course of business. We also have extensive experience advising companies and shareholders involved in disputes among equity holders.
For your convenience, we have included below a brief description of the various business entities.
Form a C corporation
The standard corporation, also called a C corporation, is the most common corporate structure. The corporation is a separate legal entity owned by the shareholder(s). Because of this, the shareholders cannot be held personally responsible for the debts of the corporation. The shareholders’ personal liability is typically limited only to the amount the shareholder invested in the company.
Taxation implications are usually a significant consideration when deciding which corporate structure to choose. The shareholders of C corporations may experience double taxation, which simply means that corporate profits are taxed at both the entity and individual levels. Profits of the business are reported and taxed at the entity level first. Then if the corporation distributes any portion of the remaining profits to the shareholders in the form of dividends, the shareholders must report the dividend as personal income and pay taxes on it at the individual level.
Form an S corporation
An S corporation is a standard corporation that has elected a special tax status with the Internal Revenue Service (IRS). The formation requirements for an S corporation are the same as those for a C corporation, wherein formation documents must be filed with the appropriate state agency and the necessary state filing fees paid.
One reason so many small business owners choose to elect S corporation status with the IRS is that the S corporation’s special tax status eliminates the possibility of double taxation common to C corporations. With S corporations, a corporate income tax return is filed but no tax is paid at the entity level. Instead, the profits or losses of the corporation are “passed-through” to the shareholders and are reported on their individual tax returns.
Form a Limited Liability Company
The limited liability company (LLC) is a business entity that offers limited liability protection and pass-through taxation. An LLC can be managed by either the members or by managers.
The LLC allows for pass-through taxation as its income is not taxed at the entity level; however, a tax return for the LLC must be completed. Any income or loss of the LLC as shown on this return is passed through to the owner(s). The owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax.
As with corporations, the LLC legally exists as a separate entity from its owners. Therefore, the owners cannot typically be held personally responsible for the debts and liabilities of the LLC.
Form a Nonprofit Corporation
A nonprofit corporation is an entity formed for purposes other than making a profit. Nonprofit corporations are formed pursuant to different state laws than standard for-profit corporations; however, the process of forming a nonprofit is very similar.
To be considered tax-exempt, nonprofits must apply for federal and state (if applicable) tax-exempt status. Tax-exempt status is not automatically granted once the nonprofit corporation is formed. To apply for federal tax-exempt status, Form 1023 must be filed with the IRS. For state requirements, it is best to contact the department responsible for taxation in the state of formation.
Like standard for-profit corporations, nonprofits provide limited liability protection. The personal assets of the directors or officers typically cannot be used to satisfy the debts and liabilities of the nonprofit.
To qualify for federal tax-exempt status under 501(c)(3) of the Internal Revenue Code, the nonprofit must be organized and operate for some religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals or children purpose permitted under this section of the code.