Legal Question in Business Law in California

Re: LLC and regular Corporations

There are many differences. Whether these are advantages or disadvantages depends on the circumstances of the particular business and its owners.

First, a Limited Liability Company is treated like a partnership for most income-tax purposes. An 'S' corporation is similar, but not identical, to an LLC in tax treatment. That is, the entity does not pay tax; instead, its income or loss is passed through to the partners, members or shareholders as the case may be. In contrast, 'C' corporations pay taxes at the corporate level on their earnings.

Second, an LLC is owned and managed more like a partnership; its founders are relatively free to arrange for management and control through private contract among themselves.

Taxation considerations usually (but not always) point to an LLC or 'S' corporation for a new small business. Larger businesses, especially any that expect to 'go public' soon should be 'C' corporations. Due to small but sometimes important tax-rule differences, LLCs are often better for farming and real-estate-heavy business than 'S' corporations.

Whether a business entity is a corporation or an LLC is determined at its formation. Once formed, whether a corporation is 'C' or 'S' is determined by the election of its owners, which election can under some circumstances be changed.

All three (LLCs, 'S' and 'C' corporations) shield their members or shareholders from personal liability for business debts when properly capitalized and managed; partnerships do not.

If you are unsure of what kind of entity to use or which taxation election to make, see a business accountant or attorney before forming the business entity.