Legal Question in Business Law in California

Re: Corporations

From a liability standpoint, if done correctly, each should offer the appropriate protection. However, there are significant tax consequences for each form. Because each situation is unique, a thorough examination of your business, assets, desired management structure, etc., is necessary. Taking the time to sit down with a business attorney would be worth the effort and expense.

Re: Corporations

Typically, a 1 or 2 person business tend to chose LLCs or a corporation with a "S" election. Both are deemed "pass through" entities, unlike c-corporations which are taxed twice. In terms of liability protection, corporations and LLC are very similar, and if you're really concerned with getting sued, then as Mr. Whipple wrote, you should get some type of insurance. I believe the major differences will come down to taxes. So it is advised that you consult with an accountant as well. I wrote an article regarding the difference between LLCs and s-corporations. That would be a good place to start for additional information.

Re: Corporations

Well, this professional isn't going to go out on a limb and tell you that one is better than the other. In most cases, the differences have little impact on the functioning of the business and its safety and net after-tax profit. There are special situations that make one or the other very preferable, to be sure. I will mention a few of them:

1. Since an "S" corporation cannot have a non-resident alien stockholder, if one of the proposed owners is a nonresident alien that's a good reason to use an LLC.

2. LLCs are subject to an additional franchise tax over and above the $800 per year both LLCs and corporations must pay to the State of California. The tax is based on gross revenues, much like a sales tax. Therefore, LLCs are not great for high-volume, low-margin businesses such as a lot of retailing may be.

3. On the other hand, LLCs often can pass through, as deductible losses, non-"at risk" losses incurred in the startup years of businesses such as research and development, or interest losses from borrowing in certain farming and real-estate development activities, where the losses would be subject to "at risk" limitations if the business were even an "S" corp.

The list goes on and on.

When the professionals advise you one way or the other, the thing to do is ask WHY they make their recommendation. Incidentally, from a liability-limiting protection standpoint, I think protection depends more on knowing and following the rules for operating your business entity than whether the entity is an LLC or corporation.

Finally, don't overlook insurance as a key element in liability protection.