Incorporation versus Limited Liability Company
Incorporating has been around since the USA was founded whereas Limited Liability Company's ("LLC") have only been around since 1979. The first State with an LLC was Wyoming in 1979. California allowed LLC's since 1995-a relatively short time. Thus many laws for LLC have not been reviewed by Courts and many decisions are based upon corporation law in California.
An LLC is a hybrid between a corporation and a partnership. The LLC has the benefit of limited liability meaning that the owner’s liability is limited to their investment in the entity. Of course there are exceptions to limited liability such as piercing the corporate veil meaning that when the structure of the LLC is not followed, compliance with the rules are not followed, the LLC assets are comingled with the individual owners or the owners intentionally act such as fraud or assault.
In most cases the LLC liability is the same as a corporation. An LLC is easier to manage. An LLC is composed of members similar to shareholders. The LLC has a Manager or is managed by multiple managers or all members. The LLC has an operating agreement that details the rules and procedures for actions of the LLC. Thus an LLC is much easier to manage than a corporation.
California LLC's have a gross revenue tax. This means that California LLC may have a loss or little income and yet due to their revenues pay taxes. Thus the LLC is easier to manage but you may pay taxes when you have revenue but are not making a lot of money.
LLC's are limited to those who may operate as an LLC. A doctor or lawyer cannot open an LLC in California. Their only option is a professional corporation. They are required to have a license and are not allowed to form an LLC in California.
Corporations have existed for hundreds of years. A corporation is structurally mor well known. A corporation is owned by shareholders. Shareholders elect directors. The directors manage major issues of the entity. Directors appoint officers. Meaning you must control the Board of Directors to determine who can be an officer of the corporation. Typical Officers of a corporation are a President (or chief Executive Officer), A Chief Financial Officer ("CFO") or treasurer and a Secretary. A Secretary of a corporation is not the traditional secretary in a office. The Secretary of the Corporation drafts the minutes for the corporation, the bylaws, signs every stock certificate and notices meetings. Corporations that have attorneys typically have the lawyer act as Secretary of the Corporation.
Minutes are the actions of the corporation that detail who can act, what actions are taken to operate. When an entity is formed the first action of the corporation is to have an organizational meeting-the FIRST action of the corporation. Even the first meeting requires notice to necessary parties that a meeting will occur. Typically the first meeting will be attended by the incorporator, the shareholders and expected Directors. The meeting will discuss the filing of the articles of incorporation, approval by the California Secretary of State. The California incorporation number and date of filing will be the first minutes of the meeting. Secondly the bylaws will be adopted and approved by the Board of Directors. The Bylaws are the rules and regulations for the corporation. The quota to have a meeting, who can vote, who is an officer or director. What is each officer and their role? For example the duties and responsibilities of each officer is listed in the bylaws. The requirements for notice for a meeting. Setting the date for an annual meeting and how to set a special meeting. There are many rules in the Bylaws and it's a good idea to know what's included in the bylaws for your corporation. The next items in a corporation minutes are determining the first directors of the corporation and then the officers of the corporation with their titles. The minutes should include the bank where you will open your account, the accountant if you have an accountant. Whether you want to make an S Election or not. An S corporation means the income and expenses of the corporation shareholders in relation to their ownership interests are passed through to each shareholder. Meaning if you own 30% of a corporation then 30% of the corporation revenues and 30% of the expenses will pass through to you in the form of a K-1 statement, The net profit or loss attributable to your 30% ownership will then be listed on your personal income taxes as the income or loss passes through to you individually. An S Election has a short deadline to file, requires all shareholders to consent in writing, the filing of a form 2553 with the Internal Revenue Service ("IRS") and the IRS approval. In order to qualify as an S corporation you must be a resident alien or citizen of the United States.
Advantages of Incorporation versus LLC
1-No gross revenue tax in California
2- Only option if you are a professional
3-Many cases decided to determine the outcome for various situations
4-More well known
Advantages of Incorporation versus LLC
1-No minutes necessary annually, just the operating agreement determines how actions are required
2-Can be a non-citizen of USA or not immigrating to USA (no requirement to be a resident alien of USA)
3-Your taxes-unless a one member LLC-are automatically passed through to your individual tax return without any need for an S Election or approval requirements (unless you are a one person LLC)
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