Becoming an incorporated business has many advantages, including liability protection and ease of growth and transferability. However, incorporating a business requires payment of state franchise taxes, and fees to other professionals including attorneys and CPAs. If you are interested in incorporating your business, a corporate lawyer in San Jose can help you understand whether the benefits are worth the costs. Some of the most commonly cited benefits include:
As a corporate lawyer can explain, the assets of the owners of an incorporated business will not be subject to the liabilities of the business if proper formalities are followed. The required formalities include everything from making sure that proper corporate governance procedures are followed and documented, to making sure that the owners keep their personal activities separate from the corporation’s activities. On-going review by a corporate attorney can help you make sure that the liabilities of the incorporated business stay with the business so that your personal assets are shielded from the liabilities of the business.
Corporations face a myriad of tax issues, and resolving these issues often requires you to choose between a number of trade-offs. For example, the earnings of an “S corporation” are not taxed, for federal purposes, at the corporate level. The earnings of a “C corporation”, however, are taxed at the corporate level. That may make an S corporation the entity of choice until you realize that the number and type of shareholders, or owners, of an S corporation are limited. This can create impediments to accepting outside funding for the company. In addition, shareholders of an S corporation may be taxed on their share of corporate earnings, regardless of whether the corporation actually distributes them their share of those earnings. It is important to have a corporate attorney and CPA who work closely together to help you determine the best corporation for you and your business.
Outside Investment and Sale
Corporations are designed to raise capital, and to allow the owners to invest in the business whether or not they are actively involved. If your business will need outside capital to get started, or to grow, the corporation is usually the preferred type of entity to use. If you decide ultimately to sell your business, a “sale” of a corporation to another corporation can be accomplished in a manner that will defer any tax on the sale until such time as you receive cash for your business.
A corporate attorney should work closely with a client’s other business advisors, including financial advisors and accountants. This team approach for a business attorney is critical in structuring business transactions and also choosing the appropriate entity structure that will help achieve the best tax consequences for clients. This process may include copying other advisors on completed entity formation documents and contracts, so that these advisors have all necessary information at tax time. However, that may be too little, too late. A good business attorney will know when to bring in the client’s other advisors early so that they can contribute information to the planning process of any legal project, whether it is the structure of a form contract for liability protection or the formation of a new business entity such as a corporation, partnership or LLC.
A good business law firm takes tax planning into account when choosing the best entity type for a business. They look at different tax advantages and disadvantages and match those with the needs and goals of the founding members. This ensures the correct type of business entity is chosen to meet the needs of the business, and that any new business entities are set up correctly. When lawyers assist a client with the choice of entity decision for new businesses, they address potential state franchise taxes and involve the company accountant to account for any income tax consequences for the company and owners. This is especially important in California where the franchises taxes differ significantly between a corporation and a partnership or limited liability company. A corporate attorney will also work with the company’s accountant to ensure that all of the company’s advisors have the same future expectations. This allows each advisor, including the corporate attorneys, to advise the business owners accordingly. The team approach results in better protection for the business and its owners.
Before you decide what type of legal structure is best suited to your business, you should be sure to speak with a business attorney at a corporate law firm serving San Jose . There are a number of important factors that should affect your decision, and it’s important that you take the time to understand each of them.
One rule of thumb is that if you are going to plan to take out cash on an on-going basis, you should consider choosing an entity that isn’t separately taxed. If, however, you plan to build a company where you will constantly reinvest profits and make all of your money when you sell your company (or take it public), a C corporation is something you should consider. Here is a guide to the most common structures chosen by startup companies—and some of the things you should keep in mind when you make your decision.
A C corporation is a type of corporation which is taxed separately from those who own it. Unlike S corporations and limited liability companies, owners of a C corporation which receive dividends will be taxed twice—once at the corporate level and once at the individual level. This means that their income will not be taxed as self-employed income.
An S corporation is a type of corporation in which the profits pass directly through to the owners or shareholders. These profits are only taxed at the individual level. Having an S corporation allows you to avoid the double taxation that comes with being a C corporation. As with a C corporation, shareholders in an S corporation will not be subject to self-employment taxes. Ownership requirements for S corporations are stricter than those for C corporations or LLCs and therefore limit outside funding opportunities.
Limited liability companies
A limited liability company—or LLC—is structured like a partnership, but has limited liability like a corporation. Like an S corporation, the owners of a limited liability company will only be taxed once—at the individual level—for all earned income. However, they will be subject to the self-employment tax.
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