Business Structures in California for Solo Owners

WHAT ARE THE FEATURES OF EACH STRUCTURE?

Sole Proprietorship Limited Liability Company (LLC) S Corporation C Corporation
Personal liability? YES, you are personally liable for the business. This means your personal assets are subject to be taken to satisfy all business debts and obligations.

 

You are also personally liable for what your employees do for the business

NO personal liability for business activities.* Your personal assets are protected from business debts and obligations.

 

You are not personally liable for what 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 sole proprietorship.

 

If business name does NOT contain your last name, 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 for stock issuance ($25+); keep separate bank account & records; prepare “minutes” paperwork
Tax treatment (default) Taxed as individual on profit/loss Taxed as individual on profit/loss + LLC tax on gross income (but LLC may elect to be taxed same as S corp) Taxed as individual on profit/loss + 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 elects S to be taxed as S corp) $800, starting 2nd year
Tax filings Only file individual tax returns, using Schedule C to report income/loss File (1) individual tax returns reporting income/loss + (2) part of CA Form 568 (unless LLC elects to be taxed as S Corp) File (1) individual tax returns + (2) federal & state corp tax returns
Limitations on who can form?  None significant Certain professions can’t form LLCs (e.g. accountants, lawyers, doctors) Owner must be Legal Permanent Resident (green card) or U.S. Citizen  None significant
Other Advantages Less paperwork More flexible management structure Better for obtaining investment & financing; Can do a Benefit Corp/Social Purpose Corp