Experienced Orange County Business Tax Attorney Ready To Serve You
Orange County is a fantastic place to live and work. With our many beaches, Disneyland, Knotts Berry Farms, and so much more to entertain our many visitors and residents alike – what could be a better place to open and own your own business? So if you are of an entrepreneurial mindset, you may be wondering what assistance an experienced Orange County business lawyer like Allison Soares, Attorney at Law might be able to give you throughout the life of your company.
Protecting Small Businesses
Small businesses often open on a tight budget, so things that are not of immediate importance – or seem that way – can easily be put off until “another day” in the eyes of the owner. And while that may seem to make sense, the truthfulness of this mindset really depends on whether you are focussed on your long term or short term goals. When looking at the big picture, it is easy to spot the error of thinking short-term. You might be tempted to put off things like hiring an Orange County business attorney to help protect your business now, simply because your company is brand new and you don’t have much to protect yet. But skimping out on important legal protection now can cause massive problems down the road – problems that can end up costing you many thousands of dollars or worse.
When forming your business, there are many questions that you will likely have. You can attempt to research these issues online, but nothing is as accurate or as much protection as working with a lawyer. When you research issues online, you really have no way of knowing if the information that you are getting is accurate. It may have been written years ago, and the laws of your state may have changed since then. Or the information may have been lacking vital specifics that matter a great deal to the type of business that you are starting.
The only way to know for sure that you are setting up your business on solid ground is to work with a lawyer who knows business law in your area – like an experienced Orange County business attorney. They will not only have the proper information that is complete, accurate, and up to date, but they know how to best protect your business for years and decades to come. This is not something that can be learned from a bit of quick research on the internet; it comes with years of law school and legal business experience helping other entrepreneurs just like yourself. We can help you answer questions like:
- What sort of business entity would be best for my business (Partnership, sole proprietorship, limited liability company (LLC), S-corporation, C-corporation, etc.)?
- What are the tax implications for each entity above?
- Which business format will give me the best protection for my personal assets?
Deciding which business entity to use is only the first step in the process. Certain things are required of businesses, such as corporations, in order to remain valid corporations in the long run. If you fail to continue to monitor and maintain your corporate status properly, then if a lawsuit comes down the pike, you may be in for quite a shock. For instance, if you haven’t held shareholder or director annual meetings etc., the plaintiff who is suing you may attempt and succeed at “piercing the corporate veil,” which puts you personally at risk for the debts of the company.
An Orange County business tax lawyer can also help with protecting intellectual property. This is anything that is created by the business – from logos, names, and branding items, to architectural blueprints for an architecture firm or software for a software design company.
C Corporation and S Corporation
The standard corporation, or C corporation, is a separate legal entity owned by shareholders. You form the corporation by filing incorporation documents with a state and paying the related filing fees. The corporate structure limits each owner’s (shareholder’s) personal liability for the corporation’s business debts to the amount invested in the company by the shareholder.
An S corporation is a standard corporation that has elected a special tax status with the IRS. The formation requirements are the same as those for C corporations: incorporation documents must be filed with the state and appropriate filing fees paid. The S corporation’s special tax status eliminates the double-taxation that can occur with a C corporation’s income. A corporate income tax return is filed, but no tax is paid at the corporate level. Instead, business profits or losses “pass-through” to shareholders and are then reported on their individual tax returns. Any tax due is paid by shareholders at their individual tax rates.
Who should consider an S corporation?
An S corporation might be the right business type for you if:
- You want to take advantage of the benefits that the corporate business type holds, but you want to take advantage of pass-through taxation.
- You want the flexibility to set salaries for employees/owners to minimize Social Security and Medicare taxes.
- The flexibility of accounting methods is desired because corporations must use the accrual method of accounting unless they are considered to be a small corporation (with gross receipts of $5 million or less) and S corporations typically don’t have to use the accrual method unless they have inventory.
- Lower risk of IRS audit exposure is desired because S corporations file an informational tax return (Form 1120 S U.S. Income Tax Return for an S Corporation) and there is a higher audit rate for business income that is reported solely on Schedule C of Form 1040 (U.S. Individual Income Tax Return).
Differences Between C Corporations and S Corporations
Taxation – C corporations are separately taxable entities and file a corporate tax return, reporting profits or losses. Any profits are taxed at the corporate level, and losses don’t pass through for use by the shareholders to offset other taxable income. The profits of C corporations face possible double taxation when corporate income is distributed to shareholders as dividends. First, the corporation pays tax on its corporate income; then, the shareholders pay personal income tax on the same income when it is distributed to them as dividends. S corporations, however, are pass-through tax entities so there is no tax paid at the corporate level. Profits and losses are passed through the corporation and reported on the shareholders’ individual tax returns. Any tax due is then paid by the shareholders at their individual tax rates.
Corporate Ownership – C corporations can have an unlimited number of shareholders, while S corporations are restricted to no more than 100 shareholders. Also, C corporations can have non-U.S. citizens/residents as shareholders, but S corporations cannot. S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships, or many trusts. C corporations are not subject to those same restrictions. S corporations can have only one class of stock (disregarding voting rights), while C corporations can have multiple classes.
S Corporation Election – A corporation must elect to become an S corporation by making a timely filing of Form 2553 with the IRS, and all shareholders of the corporation must agree in writing to the S corporation election.
What is an LLC?
A Limited Liability Company (LLC) is a hybrid type of business entity that offers all of its members limited liability as if they were shareholders of a corporation but treats the entity and its members as a partnership for tax purposes. The Limited Liability Company combines some of the best elements of the corporate and partnership forms of conducting business without some of the drawbacks of either form.
Similar to a corporation, the members and operating managers of the LLC are not liable for the debts, obligations, or liabilities of the company. Unlike a limited partnership, there is no need for the existence of a general partner with unlimited liability.
Unlike an S corporation, there are no restrictions on the ownership of a limited liability company. An LLC may own a controlling interest in a corporation and may be owned by a corporation. As with a partnership, there are restrictions on the members’ right to transfer an interest in the LLC. However, the members do have a voice in the management of the company, which limited partners of a partnership do not. As mentioned above, the LLC is treated as a Partnership for tax purposes. This means the items of profit, loss and deduction pass through to the members and the LLC, as an entity, is not subject to income tax. If you need help, speak with the knowledgeable Orange County LLC attorney at Allison Soares, Attorney at Law today.
Limited Liability Company Operating Formalities
LLCs offer untoward flexibility with respect to management and operation, excellent protection from liability, and they offer profound taxation benefits in the form of their pass-through taxation. There are certain operational and organizational steps, sometimes known as “LLC formalities,” that must be taken and adhered to in order for the members to enjoy all of the limited liability and taxation benefits afforded the LLC.
Piercing the Corporate Veil
“Piercing the corporate veil” is the equitable remedy courts use to disregard the corporate structure and this can translate into a piercing of the “LLC veil.” The courts can pierce the corporate veil and make the owner(s) personally liable for any debts or obligations of the company if: 1) a corporation is found not to be operating in observance of the formalities, 2) an owner is exercising excess control, 3) funds are being grossly misappropriated for the benefit of an owner, or 4) if the corporation is deemed to be operated in such a manner as to cause harm to another entity.
Traditionally, courts have looked at numerous factors to determine whether a controlling member engaged in improper conduct. Chief among these factors is the lack of an operating agreement, or a poorly written one. Additionally, a failure to maintain adequate records of acquisitions, business transactions, membership transfer ledgers, and minutes of meetings could lead a court to disregard the entity and hold the controlling member personally liable.
While the rules are not as stringent for an LLC as for a corporation, you still need the following formalities in place in order to avoid piercing the LLC veil:
- Have a well-written operating agreement with well-defined roles for members, clearly outlined distribution guidelines, and operational and taxation rules.
- Maintain adequate records for all transactions and business engagements, as well as properly written minutes of meetings. You should have organized records showing a list of members, past and present, a copy of the filed articles of organization, tax returns for the past three years, bank statements, resolutions authorizing activities that, either by law or under the terms of the operating agreement, require a vote of the members.
- Ensure adequate capitalization for the company and maintain proper operating capital.
- Have a separate bank account for the LLC and never co-mingle LLC funds with personal funds.
The LLC should never be treated as an extended personal account of its owners or members. The courts and tax regulatory boards regularly examine the financial dealings and workings of an LLC to determine whether it is a working business or an independent profit center for its owners or members. If it is deemed an independent profit center, the veil could be pierced and there can be tax penalties and liabilities against the owner or members personally.
An LLC should pay and guarantee its own debts, unless specifically outlined in the operating agreement for specific requirements for such things as the rental or leasing of real property, etc. At times, if an owner or member regularly guarantees or pays debts, he will have been shown to act as an alter ego of the LLC and hence will cause that LLC to lose its separate entity status. Owners should not pay or guarantee the debts of their own LLC unless it is specifically outlined in the operating agreement for specified purposes.
So while a “formal” set of rules is not a requirement outlined by any state for an LLC, the concerned and astute business person or LLC member will understand that there are LLC formalities to be followed and adhered to in order to fully enjoy the benefits afforded by the LLC. Let a skilled Orange County LLC lawyer help you today.
Business Dissolution or Succession Planning
When people are in the trenches of opening a business, one of the last things that they really want to take time to think about is exit strategies or what happens when one or more founding people want to leave the company. That can feel a bit like planning for divorce while planning your wedding. But, matrimonial bliss aside, when planning your business, it is critical that exit strategies are carefully considered and codified in the by-laws of your business. Any power shifts must happen smoothly and in a way that avoids legal issues that might jeopardize the health of the business.
Speak With a Trusted Orange County Business Lawyer Today
No matter what stage of growth your business is in, having an experienced Orange County business attorney at your side will help you to smoothly maneuver through the landmines of business ownership.
Allison Soares practices the following legal areas:
- EDD audits, appeals, and collections
- IRS tax matters and audits
- CDTFA audits
- FTB audits
- Business law (business advisory services)
- Business formation
- Corporate law
- And other business tax matters in California
Let us help you plan for success by calling today to set up a consultation, or contact us online. We look forward to helping you take your business to the next level.