After Starting A Business When Do You Form A California Corporation?

By Author: corporateamerica
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Forming a California Corporation can be a scary concept to many small-business owners. You are excited as the dream product, the side-job or the interesting hobby is actually bringing in an income, but you are uncertain as to what the advantages of incorporating are over staying as a self-employed successful businessperson. There are several issues to look at for each type of corporation – tax, liability, and locus of control.

Tax
For the purposes of taxation, there are four main categories. Sole proprietorship includes partnerships and some LLCs. Normal corporate tax structure includes most LLCs, C-corporations, and other more exotic corporate forms. The S-Corporation has a unique taxation plan, and the final category is non-profit (501-C-3).
If you can run your business comfortably as the only employee, then staying a sole proprietorship can be an indefinite tax solution. As you grow, though, the tax advantages for a C-Corporation are significant, because employee’s pay gets detracted from before tax income, your salary included. An additional option is the S-Corporation, a hybridized tax form that distributes ...
... income, expenses and liabilities to each owner and only taxes them once. The biggest problem with the corporate tax structure is that the corporate earnings are taxed, and then the dividends are taxed at a personal income bracket as well.

LLCs, for tax purposes, will be classified as either a sole-proprietorship or a corporation, and taxed accordingly. Partnerships are also often treated as two sole proprietors. In deciding what form or when to change forms of business ownership, your main questions are whether the income-to-expense ratio makes a corporation (C or S) than a sole proprietorship.
Liability
Businesses get sued. Businesses take on debt. Both of these facts of life are reasons to form a legal structure to protect your personal life from your business. LLCs, C-Corporations, and S-Corporations are all protected under the legal term the veil of liability, or corporate veil. Protection from liability is one of the most important reasons to incorporate over running as a sole-proprietor. In the case of bad debt being called, or a judgment being enacted against your business, the only assets that can be legally touched (except in cases of financial fraud, where you steal from your business) are your business’s assets. This gives great peace of mind to an aggressive business owner’s significant others.
Locus of Control
The final question to ask when considering whether to incorporate, and what kind of corporation, is who gets to make the final decisions? An LLC, when the corporate veil is protected, can offer the same level of control as a sole proprietorship, while offering tax and liability advantages. Corporations all give up a certain level of control from the business owner. Corporations can be owned solely by one individual, but this causes state and national regulatory/taxing agencies to look closely at how you separate business from personal finance and control. Generally, corporations of all types require sharing power among a board of directors, with different amounts of control according to different amounts of ownership. If you are fine with giving up some control in order for tax and liability benefits, then forming a corporation might be right for you.

Additionally, giving up control can be a huge financial asset. A corporation can sell ownership in the company to raise capital. For people who are willing to trade control for other benefits, offering stock is a great option, albeit a heavily regulated one.

For more information about how and when to incorporate, please contact us.