We represent clients from all U.S. and International locations regarding Federal Tax and California Issues.
The forms of business available in California provide varying levels of personal asset protection for the business owner, various tax advantages and disadvantages, complexity or simplicity of operation of the business, and other characteristics and choices. The traditional business forms of sole proprietorship, corporation, and partnership were joined in the mid-1990s by newer forms of limited liability entities. California maintains a web portal designed to assist small businesses and fledgling entrepreneurs. It is available at https://businessportal.ca.gov.
Sole Proprietorship: A sole proprietorship is the easiest business to organize as it does not have a legal existence that is separate from its owner. Therefore, it is not an entity formed under state law. Operating a sole proprietorship requires a fictitious business name filing (or DBA registration) if the business is not operated in the owner’s name.
Partnerships: A general partnership is easy to organize. A written partnership agreement is recommended but not required. The partnership agreement will dictate how income and losses are allocated to the partners. If no agreement is in place, partnership items pass through based on the partners’ respective ownership interests.
C Corporations: A corporation is an entity formed under state law which has its own legal existence. Corporations must hold periodic board meetings and keep minutes. Corporations must comply with federal and state regulations.
S Corporations: An S corporation is taxed in a manner consistent with an election it makes by timely filing Form 2553. A corporation’s eligibility for the S election is dependent on how many and what types of shareholders are involved. Certain events, including acquiring an ineligible shareholder, may cause automatic termination of S status.
LLCs: A members operating agreement is recommended for delineating the rights and obligations of the LLC members.
Sole Proprietorship: The sole proprietorship must use the same tax year as the owner. No balance is required to be filed for tax purposes. Net income is reported via form Schedule C on the owner’s 1040.
Partnerships: Depending on income and assets, the partnership may be required to include a balance sheet with its income tax return so the double-entry bookkeeping method is recommended. If a partner exchanges property other than cash in exchange for an interest in the partnership, special accounting and tax rules apply.
C Corporations: The balance sheet on a C Corporation’s income tax return must either agree with the corporate books or any permanent or temporary accounting and or timing differences must be reconciled via form M-1 of the C Corporate return (Form 1120). A corporation must use a double-entry bookkeeping system and is often required to use the accrual method of accounting. It must file all necessary employment and income tax returns.
S Corporations: The balance sheet on an S Corporation’s income tax return must either agree with the corporate books or any permanent or temporary accounting and or timing differences must be reconciled via form M-1 of the S Corporate return (Form 1120-S). An S Corporation must use double-entry bookkeeping. An S corporation must file all required payroll and income tax returns.
LLCs: The same rules apply as in a sole proprietorship or C or S Corporation (if elected) for a single-member LLC. The same rules apply as a partnership or C or S Corporation (if elected) for a multi-member LLC.
Sole Proprietorship: The owner is free to make all business decisions, but there can be only one owner. Sale of a sole proprietorship is actually a sale of assets.
Partnerships: There are no limits on ownership for partnerships. Control of the business operations is divided among all partners. The partnership agreement may restrict the sale of a partnership interest, and may control the terms of the sale.
C Corporations: There are no limits on ownership for C corporations. Shareholders have control over the corporation to the extent that they own voting stock. Ownership is more easily transferred by selling shares of stock. The corporate charter may place certain restrictions on the sale of stock.
S Corporations: S Corporations have a limitation on the number and the types of owners. Stockholders have control over the corporation to the extent that they own stock. Ownership is more easily transferred by selling shares of stock to eligible stockholders. The corporate charter may place certain restrictions on the sale of stock.
LLCs: Control is divided among members. The operating agreement may restrict transfer of ownership interests.
Sole Proprietorship: A sole proprietorship has no continuity of existence.
Partnerships: Partnerships are subject to a technical termination if within a12 month period 50% or more of the total interest in capital and profits is sold or exchanged (IRC §708).
S & C Corporations: Corporations have an indefinite life. Death, bankruptcy, or retirement of a shareholder does not dissolve the corporation.