Deciding on the structure of a California business is one of the most important start-up decisions you will face. A C-Corporation, S-Corporation and Limited Liability Corporation all have advantages and disadvantages.
A California S-Corporation offers many of the advantages of a C-Corporation, without some of the reporting requirements and other complexities. Additionally, an S-Corporation may be eligible for pass-through tax treatment, avoiding some of the double-taxation inherent in most C-Corporations. The Los Angeles business lawyers at Howard Law can assist you with determining the business structure that is right for you and will explain the advantages and disadvantages of S-Corporations.
California taxes S-Corporations at a rate of 1.5 percent, compared to 8.84 percent for C-Corporations. But, unlike a C-Corporation, which must pay federal income taxes, an S-Corporation's income may pass through to shareholders without first being subjected to federal tax. Additionally, net profits or losses pass through to shareholder's tax returns, where it is subject to income taxes but not payroll taxes. The temptation, then, is to pay no salaries and claim profits as income distributions. However, the IRS requires reasonable salaries to be paid to all shareholder employees. Determining what is reasonable remains a matter of much debate.
While certain tax benefits exist for an S-Corporation, there are also potential drawbacks, including the cost and complexity associated with establishing the corporation, and more limited flexibility; S-corporations are limited to one class of stock and a restriction on the number of shareholders.
Additionally, S-Corporations are subjected to many of the same requirements as a C-Corporation, including corporate tax returns, director and shareholder meetings, meeting minutes, bylaws and other record and reporting requirements.
The Los Angeles business law firm of Howard Law represents clients throughout the Los Angeles area, including Santa Ana, Riverside and Anaheim. If you are considering forming an S-Corporation or need advise regarding a dispute or legal issue involving an S-Corporation, contact us today for a confidential appointment to discuss your rights.
California S-Corporation Attorneys - Call (800) 872-5925 - Howard Law