How to Incorporate a Small Business in California?

What are the benefits of incorporating a small business?

Unlike general partnerships and sole proprietorships, incorporating a business in California can provide a business owner significant asset protection. Essentially, a sole proprietor or partner assumes unlimited liability, or responsibility, for his or her business’ obligations and debts. If something goes wrong for the business, such as a judgement being made against it, then the owner’s personal assets (home, car, savings) may be at risk.

Corporations are different in that they allow business owners to keep their personal assets separate from the business, thereby protecting them from potential judgements. An owner of a corporation or LLC does not need to worry about losing his or her car or home because of a legal problem their business is facing.

• Protection of Personal Assets

Incorporate into a LLC and corporation enable business owners to protect their personal assets by separating them from the business. This means that if a company is correctly managed and structured, a business owner ought to have limited liability for a business’ obligations and debts.

• Legitimacy

A company that has “LLC” or “Inc.” after its name may benefit from an added sense of authority or credentials. Customers and vendors may have a more positive response to companies seen as legitimate, bearing the mark of incorporation.

• Availability

Corporations and LLCs are recognized in all fifty states as well as D.C.

• Protection of a Business’ Name

Depending on the state, one’s business is protected from having its exact name used by another company within the same state.

• Perpetual Existence

Even if management or ownership changes, corporations and LLCs will continue to exist. Whereas partnerships and sole proprietorships end when an owner leaves the company or passes away, a corporation or LLC lives perpetually. This is because in the United States, a corporation is considered to be similar to a person.

• Reduced Taxes

After incorporating a business in California, elect Subchapter S tax status, a corporation may skirt double taxation of dividends and corporate profits. Similarly, an LLC can file to be taxed as a corporation.

• Deductible Expenses

Typical company expenses, like salaries, can be deducted before designating earnings to owners of corporations or LLCs.

Location to Incorporate a Business in California

The location to incorporate a business in California is where they are operating. So, a California company will incorporate in the state of California. This is because:

• It is less complicated to choose one’s home state
• Incorporating a company in another state is more expensive
• One can skirt filing annual reports and paying franchise taxes in multiple states

That said, it is common for corporations to do business all over the United States and across the world. So, a corporation that has offices in many states can incorporate in one state, then register to conduct business in other states. But to conduct business in additional states, one must register, submit annual reports, and handle fees every year.

Which is better a corporation or an LLC?

Corporation and LLC provide protection for the business owner’s personal assets. Corporations are a good choice for a business that plans to seek investors. LLCs are favored by small, owner-managed businesses that want flexibility without a lot of corporate formality. LLCs tend to be popular among small-time entrepreneurs since they have the best of both worlds: the tax advantages of a partnership combined with the simplicity of a corporation. An LLC can be owned by both individuals and businesses.

Corporations offer more flexibility when it comes to their excess profits. Whereas all income in an LLC flows through to the members, an S corporation is allowed to pass income and losses to its shareholders.

Taxes

Above, we mentioned how corporations receive certain tax advantages. The nature of tax regulations really depends on the specific type of business one creates. Some of these regulations include:

• C corporations (also known as C corps) file a form 1120 to report the business’ earnings to the IRS. The IRS will tax the business’ profits at corporate tax rates. Meanwhile, dividends granted to shareholders will be taxed at individual rates. A C corp, therefore, is subject to double taxation.
  
  
• A corporation can apply to the IRS to obtain Subchapter S corporation status (S corp). This allows for “pass-through” taxation, which means that owners can report their share of business loss and earnings on individual tax returns. However, an S corp cannot have over 100 shareholders.
  
  
• An LLC has pass-through taxation, similar to a partnership or proprietorship. This way, double taxation is avoided, because the Internal Revenue Service does not assess taxes on the business.

After Incorporating

After incorporating their business, owners may wish to pursue the following steps:

• Apply for an employer identification number (EIN)
• Get business licenses and permits
• Create bylaws