you are thinking about starting a busi-ness, no doubt you have pondered thequestion, “Do I need to orm a businessentity?” Te answer is a resounding, “Yes!”
Unortunately, we live in a very litigioussociety. Statistics tell us that an estimated50,000 lawsuits are led daily in the U.S.,with nearly 1.4 million led in the State o Caliornia annually. You should take steps to protect your wealthbeore you ever get served with a lawsuit against your business. Abusiness entity provides personal liability protection rom the debtsand obligations o the business because it has its own legal identityseparate and apart rom its ocers, directors, shareholders, manag-ers or members – even i the entity consists o only one person. I you are sued based upon an occurrence arising during your businessoperations, a properly ormed and maintained business entity canlimit exposure to a judgment solely to the assets o the business--and not your amily.It is imperative to orm a business entity
you sign a lease,contract, ranchise agreement, or otherwise start to do business.Once the entity is properly ormed, every agreement must be signedin the name o your business entity. Forming a business entity be-ore you start conducting business can not only provide personalliability protection, but can also allow your entity to develop cor-porate credit.Many business owners deer the ormation o a business entityuntil ater they have done business or some time. By that time,however, they have incurred start-up costs and debt that will unor-tunately be reected on the individual owner’s personal credit. Atthat point, it is not possible to simply “roll over” the individual debtto a “limited liability” company. And it is quite dicult to unravelthe business assets and obligations rom the personal ones. Waitingto orm the entity until ater you have been in business or a year ormore means that you must in essence “start over” when orming theentity at a later point.Now that we’ve established that it’s best to protect your personaland amily assets and build credit, the next step is to determinewhich type o business entity is right or you. Whether you are go-ing it alone or with another person, the choice o a proper businessentity should be made in close consultation with a business law at-
torney and your tax advisor. Business entities include:
General Corporation (“C-Corp” or “S-Corp”)
: I properlyormed and maintained, a corporation provides protection rompersonal liability or the debts and obligations o the corporationor its ocers, directors and shareholders.“C” Corporation: A traditional “C” corporation involves the is-sue o “double taxation.” Te corporation is taxed on its income atthe corporate level, and its shareholders are taxed on distributionso income in the orm o dividends on their personal income tax.In order to maintain a corporation, corporate ormalities must bemaintained, such as annual meetings and the keeping o minutes.A “C” corporation has some tax benets, such as deductibility o health insurance premiums.“S” Corporation: A corporation that has made an election to be an“S” corporation or ederal income tax purposes is treated as a soleproprietor or partnership or tax purposes, known as “pass through”taxation; thereby, avoiding “double taxation.” “S” corporations havemany limitations in their structure, such as limits on the number o shareholders, citizenship requirements or shareholders, and issu-ance o only one class o stock.
Limited Liability Company (LLC)
: As with a corporation, a lim-ited liability company (LLC) provides personal liability protectionor the debts and obligations o the business. LLCs also have “passthrough” taxation where the income and losses pass through to theindividual members’ tax returns. An LLC may elect to be taxed asa corporation. It can be managed by all o the members or can havecentralized management in one or more o the members, known as“managers.” I properly ormed, an LLC does not need to maintaincorporate ormalities, such as holding meetings and keeping min-utes.In Caliornia, an LLC may not render proessional services, whichinclude services lawully rendered only pursuant to a license, certi-cation or registration under the Business and Proessions Code,the Chiropractic Act, the Osteopathic Act or the Yacht and ShipBrokers Act. However, the Caliornia Attorney General has opinedthat such services do not include services rendered pursuant to anonproessional occupational license under the Business and Pro-
To Incorporate or Not to Incorporate?
Protect Yourself and Your BusinessBy Selecting the Right “Entity”
By DeAnn Flores Chase, Attorney at Law