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Frequently Asked Questions about Business Organizations
Q: What is the difference between a C Corporation and an S Corporation?
A: A C Corporation is so named because it is taxed under subchapter C of the Internal Revenue Code (I.R.C.), while an S Corporation is taxed under subchapter S of the I.R.C. In an S Corporation, the income of the corporation is not taxed at the corporate level as in a C Corporation, but rather it passes through to the shareholders. All corporations generally start out as C Corporations, but shareholders can elect to switch to S Corporation status if the corporation meets certain requirements.
Q: What is the difference between an S Corporation and a Limited Liability Company?
A: The S Corporation and Limited Liability Company (LLC) both provide limited liability for all shareholders and flow-through tax treatment. However, there are numerous requirements that corporations must meet to qualify for S Corporation status that do not apply to LLCs. To qualify as an S Corporation, the corporation must be a domestic corporation with only one class of stock and with no more than 75 shareholders (all of whom are individuals, estates or certain qualifying trusts and are US citizens and residents).
If you are starting a business, selecting the business structure is one of the most important decisions you will have to make. Contact an attorney who has experience advising clients about business organizations to discuss your options.
Laguna Beach, California, Business Organization Attorneys
Nokes & Quinn is dedicated to serving the needs of business owners at all stages of the life of their business. We are adept at handling a wide range of business law issues, including business formation and commercial contract litigation. We have been serving individuals and businesses throughout California for over a combined 50 years from our law office in Laguna Beach.
Business Organizations - An Overview
Choosing the proper business organization structure is one of the most important decisions that a business owner must make. The type of organization will determine how the business handles tax matters and whether there is protection against personal liability. A business owner should consider several factors in choosing a business structure, including the number of individuals in the business, type of business, profitability of the business and insurance. The following overview provides a brief description of some of the more common types of business structures. A corporate and business lawyer can provide you with more information and help you determine which business structure best fits your individual needs.
Sole Proprietorships
A sole proprietorship is an unincorporated business owned by one person. It is a popular business structure because it is simple, easy to form and operate and subject to few rules and regulations. Unlike limited liability companies (LLC) and corporations, no paperwork must be filed with the government in order to create a sole proprietorship. In a sole proprietorship, the owner has complete control over the management of the business and retains all profits of the business. If you are planning to open a business and are considering a sole proprietorship, talk to an attorney who can advise you of the advantages and disadvantages of this type of structure.
Partnerships
A partnership is an agreement between two or more persons to do business, for profit, on negotiated and mutually agreed upon terms. There are two main types of partnerships: general and limited. General partnerships are generally governed by state laws based on the Uniform Partnership Act (UPA) or Revised Uniform Partnership Act (RUPA), while limited partnerships are governed by state laws based on the Uniform Limited Partnership Act (ULPA) or Revised Uniform Limited Partnership Act (RULPA). Partnerships have distinct advantages and disadvantages. To learn more about partnerships, contact a business attorney.
Corporations
A corporation is a separate legal entity from the business owners, also known as the stockholders or shareholders, formed upon filing the appropriate papers with the Secretary of State. Although each state has its own laws regarding the formation of corporations, many follow the Model Business Corporation Act. A state may also have laws governing procedures for businesses incorporated in other states, referred to as foreign corporations, to follow if they wish to conduct business within the state's borders. While corporations are more complex than sole proprietorships and partnerships, they also offer several benefits. If you would like to learn more about forming a corporation, talk to an experienced attorney.
Limited Liability Companies (LLC)
A limited liability company (LLC) is a relatively new business entity. Wyoming was the first state to enact an LLC statute in 1977 and Florida followed in 1982. In 1988, the Internal Revenue Service (IRS) issued Revenue Ruling 88-76, which concluded that LLCs formed under Wyoming law would be taxed as partnerships. This decision caused numerous other states to enact LLC statutes. LLCs are non-corporate entities that provide members with limited liability protection and allow members to participate in the management and control of the business. A business attorney can provide you with more information about LLCs and help you determine whether it is an appropriate structure for your business.
Choosing a Business Structure
When forming a new business, selecting the business structure is one of the most important decisions you will have to make. Business structures, including the sole proprietorship, partnership (general or limited), corporation and limited liability company (LLC) each have distinct advantages and disadvantages. Determining which structure will best suit the needs of your business and the owner(s) can depend on several different factors. When deciding on which business organization to use, an attorney can provide you with information about the different structures and help evaluate your goals and objectives.
Business Organizations Resource Links
IRS Tax Information for Partnerships
This site contains tax information for partnerships, as well as partnership-related articles.
IRS Tax Information for Corporations
This site offers many resources for corporations, including tax forms.
The Small Business Administration (SBA)
The Tools section of the Small Business Administration's Web site provides users with a wealth of information unique to small businesses through monthly chat events, electronic newsletters, pod casts and a myriad of additional business resources.
Megalaw.com
This site has links to state corporate statutes.
Financial Strategies Online
This site provides extensive coverage of the various business types and strategies for picking the one that may be best for certain businesses.
