Business Structures in California for Multiple Owners

WHAT ARE THE FEATURES OF EACH STRUCTURE?

General Partnership Limited Liability Company (LLC) S Corporation C Corporation
Personal liability for business? YES, each partner is personally liable for the business. This means each partner’s personal assets are subject to be taken to satisfy all business debts and obligations.

 

Each partner is also personally liable for what other partners and employees do for the business

NO personal liability for business activities.* Personal assets of business owners are protected from business debts and obligations.

 

Business owners are not personally liable for what other owners or employees do, but the company itself may be liable for these activities.

 

*Liability protection is maintained so long as formalities are followed (see below)

How to form? As soon as you start doing business you are considered a partnership.

 

If business name does NOT contain partners’ last names, must file “DBA” (Doing Business As, aka “Fictitious Business Name Statement”)

File Articles of Organization; Operating Agreement highly recommended.

 

 

No DBA necessary.

File Articles of Incorporation; Must adopt bylaws; issue stock; file IRS form 2553.

 

No DBA necessary.

File Articles of Incorporation; Must adopt bylaws; issue stock.

 

 

No DBA necessary.

Total filing fees If DBA (~$80) $90 $150
Formalities required None file Statement of Information every other year ($20); keep separate bank account & records file Statement of Information every year ($25); file Notices of stock issuance ($25+); keep separate bank account & records; hold 2 meetings/year
Tax treatment (default) Each owner taxed as individual on profit/loss, proportionate to ownership percentage Same as partnership + LLC tax on gross income (but LLC may elect to be taxed as S corp) Same as partnership + 1.5% S Corp tax on net income Taxed at corporate level on profit/loss + individual tax on distributions (“double taxation”)
Minimum annual entity tax None $800, starting 1st year (unless LLC taxed as S corp) $800, starting 2nd year
Tax filings Each partner files individual tax returns, using Schedule K to report income/loss + Partnership files IRS Form 1065 Each business owner files individual tax returns reporting income/loss + LLC files CA Form 568 & IRS Form 1065 (unless taxed as S corp) Each business owner files  individual tax returns + corporation files federal & state corp tax returns
Limitations on who can form? None significant Certain professions can’t form LLCs (e.g. accountants, lawyers, doctors, etc) (1) Owners must be Legal Permanent Residents or U.S. Citizens; (2) total # owners limited to 100 None significant
Other advantages Less paperwork Flexible management structure Better for obtaining investment & financing; can do Benefit Corp or Social Purpose Corp