A corporation is a legal person with rights and obligations. It may sue or be sued. It must file income tax returns. It can own real estate and personal property and contract its own debts. A corporation is a legal entity separate and distinct from its owners. It is considered a limited liability entity, as none of the owners (i.e., shareholders) are typically liable for the corporation’s debts by virtue of being a shareholder. A “C” corporation is a corporation that has not made an election to be an “S” corporation.
No. An LLC is not a type of corporation at all. Please note that “LLC” does not stand for “Limited Liability Corporation.” Rather, the acronym “LLC” stands for “Limited Liability Company.” The document (articles) filed with the Secretary of State to form a corporation and an LLC are not the same.
Corporations follow the principle of centralized management. In the simplest and most common corporate structure, shareholders elect the board of directors, who in turn appoint officers over whom the shareholders have no direct control. The board of directors is responsible for managing the business and affairs of the corporation with day-to-day control resting with the officers. The shareholders have no right to participate in the day-to-day management of the business.
All corporations formed by default are “C” corporations. A C corporation is a corporation that has not made an election to be an “S” corporation. The term C corporation is specifically used because the entity is taxed under subsection C of the IRS code. C corporations are taxed at two levels (“double taxation”). This means that the corporation itself pays its own tax when it makes money (the first tax). The owners or shareholders are then taxed again when they are paid a salary or dividend by the corporation (the second tax). Despite double taxation, C corporations offer many planning and benefit opportunities. For example, a C corporation can be used to accumulate assets or wealth at corporate tax rates, which are lower than the individual tax rates.
An “S” corporation is a corporation that has made an election with the IRS to be treated for tax purposes as a “pass-through entity.” This means that corporate profits and losses are passed through to the shareholders (owners) who report them on their own personal tax returns and pay the tax at the individual level. The corporation pays no federal income tax at the corporate level. The “S” in S corporation refers to the subsection of the IRS code under which the corporation is taxed.
No, the decision to elect to be an S corporation is not permanent. If it later becomes apparent that there are tax advantages to operating as a C corporation, you may easily drop your S corporation status after a certain amount of time.
Professional corporations are corporations organized for the purpose of providing professional services. Typically, professions that require a license, such as doctors, lawyers, chiropractors, accountants, architects, or engineers are required to form professional corporations. Typically, professional corporations must be organized for the sole purpose of rendering professional services of the licensed practitioners.
Professional corporations can be either “C” or “S” corporations.
In California, the following licensed professionals are NOT permitted to form regular “for profit” corporations or LLC’s, and must instead form “professional corporations”:
- Clinical Social Workers (Licensed)
- Marriage and Family Therapists
- Naturopathic Doctors
- Pest control
- Physical Therapists
- Physician Assistants
- Shorthand Reporters
- Speech-Language Pathologists and Audiologists
*Note: Architects and veterinarians have the option to incorporate as either regular business corporations or as professional corporations.
Clients often raise the issue of incorporating in states such as Nevada and Delaware. Incorporating out of state is often not a good idea for small business owners given the additional financial costs that will be incurred by doing so.
Millions of companies regularly conduct business in the State of California. If you have a business nexus in California then you are part of its tax system. The following questions can be used to determine whether or not you are or will be a part of the California tax system and whether a California corporation or LLC is right for you:
- Do you live in California?
- Do you have a business location in California?
- Do you or your employees work in California?
- Do you own real estate in California?
If you answered “yes” to any of those questions then you are or will be part of the California tax system. This means that you must pay taxes in California, even if your corporation is another state such as Nevada or Delaware. Incorporating in another state with apparent lower corporate income tax is not likely to save you much money. If your business is making money from business conducted in California, even if incorporated in another state, you must still pay California taxes on the income. That is, you would be paying taxes in two states, potentially doubling your tax bill.
Additionally, a corporation that incorporates in Nevada or Delaware must separately qualify to do business in California. This process takes as much time and can cost as much money as originally forming the corporation in another state. Moreover, you would also need to appoint a corporate agent to receive official notices in the other state — another cost you would have to bear. Finally, you would also have to pay annual registration fees, franchise taxes and gross receipt taxes (which can easily reach into the thousands) in two different states.
In conclusion, if your business is based in California, you likely are not going to save any money by setting up an out-of-state entity. In fact, it will likely cost you much more than setting up a corporation or LLC in California.