The recent real estate boom has many construction-based businesses reconsidering the structure of their business. Recent changes to California state law have increased the number of factors contractors should consider when deciding which business organization structure is best for their purposes. If you have been operating as a sole proprietorship/general partnership, recent changes to the law in combination with the real estate boom probably have you wondering what the advantages might be of setting your business up as an LLC or S Corporation (S Corp).
You might, as many business owners are, be under the assumption that restructuring your business would be too expensive or too time consuming, but neither drawback should prevent you from benefitting from reorganization. The LLC: Now an Option for California’s General Contractors The LLC is now an option for contractors looking for protection for their personal assets. Previously, only individuals or corporations could be licensed. This led many contractors and other professionals looking for liability protection towards incorporation. California now allows LLCs to be licensed; although licensing your LLC will mean higher fees in comparison to individuals or corporations. Depending upon the needs of your company, the LLC could hold all the advantages you need. For others, the S Corp might be the best option. The LLC provides the advantage of tax flexibility and less paperwork. Like corporations, the LLC offers members protection from liability. With the liability protection provided by the LLC structure, members are not personally liable for debts incurred by the company. It’s a shield that isn’t provided in sole proprietorships or traditional partnerships. The LLC also comes with disadvantages such as the self-employment taxes. …show more content…
In a corporate structure, profits are taxed at the corporate level, but under the LLC structure, the profits pass through to its members who then account for the profits on their personal federal tax returns. These taxes often end up being higher than they would be if the company was set up with a corporate structure. Many also find the LLC structure results in confusion about roles. Corporate structure typically designates directors, managers, employees, etc. LLCs generally do not; which can lead to confusion regarding who is in charge, who is eligible to sign contracts, etc. Lastly, LLCs have a limited life. If a member departs the company, the LLC ceases to exist. Corporate setups prevent individual shareholders from affecting the identity of the company. Of course, some of these issues can be addressed through carefully prepared Operating Agreements. The S Corp: A Popular Choice for California’s General Contractors The S Corp issues stock, is governed as a corporation, has shareholders (owners), and provides similar protection …show more content…
The S Corp shareholders’ personal assets cannot be seized in order to fulfill the business’s financial obligations or liabilities. The S Corp is also treated as a pass-through entity for federal tax purposes. Unlike the C Corporation, individual shareholders of the S Corp avoid double taxation (taxes at both a corporate level and again at the shareholder level). Each S Corp shareholder is subject to his or her own individual tax rate.
The S Corp has both advantages and disadvantages. It provides protection for shareholder assets. It offers the benefit of pass-through taxation (particularly advantageous during startup). Under the S Corp structure, shareholders can be employees with a combination of salary and dividend payments/tax-free dividend payments. This can reduce contractors’ self-employment tax liability. Other benefits of the S Corp structure include: straightforward transfer of ownership and heightened
You might, as many business owners are, be under the assumption that restructuring your business would be too expensive or too time consuming, but neither drawback should prevent you from benefitting from reorganization. The LLC: Now an Option for California’s General Contractors The LLC is now an option for contractors looking for protection for their personal assets. Previously, only individuals or corporations could be licensed. This led many contractors and other professionals looking for liability protection towards incorporation. California now allows LLCs to be licensed; although licensing your LLC will mean higher fees in comparison to individuals or corporations. Depending upon the needs of your company, the LLC could hold all the advantages you need. For others, the S Corp might be the best option. The LLC provides the advantage of tax flexibility and less paperwork. Like corporations, the LLC offers members protection from liability. With the liability protection provided by the LLC structure, members are not personally liable for debts incurred by the company. It’s a shield that isn’t provided in sole proprietorships or traditional partnerships. The LLC also comes with disadvantages such as the self-employment taxes. …show more content…
In a corporate structure, profits are taxed at the corporate level, but under the LLC structure, the profits pass through to its members who then account for the profits on their personal federal tax returns. These taxes often end up being higher than they would be if the company was set up with a corporate structure. Many also find the LLC structure results in confusion about roles. Corporate structure typically designates directors, managers, employees, etc. LLCs generally do not; which can lead to confusion regarding who is in charge, who is eligible to sign contracts, etc. Lastly, LLCs have a limited life. If a member departs the company, the LLC ceases to exist. Corporate setups prevent individual shareholders from affecting the identity of the company. Of course, some of these issues can be addressed through carefully prepared Operating Agreements. The S Corp: A Popular Choice for California’s General Contractors The S Corp issues stock, is governed as a corporation, has shareholders (owners), and provides similar protection …show more content…
The S Corp shareholders’ personal assets cannot be seized in order to fulfill the business’s financial obligations or liabilities. The S Corp is also treated as a pass-through entity for federal tax purposes. Unlike the C Corporation, individual shareholders of the S Corp avoid double taxation (taxes at both a corporate level and again at the shareholder level). Each S Corp shareholder is subject to his or her own individual tax rate.
The S Corp has both advantages and disadvantages. It provides protection for shareholder assets. It offers the benefit of pass-through taxation (particularly advantageous during startup). Under the S Corp structure, shareholders can be employees with a combination of salary and dividend payments/tax-free dividend payments. This can reduce contractors’ self-employment tax liability. Other benefits of the S Corp structure include: straightforward transfer of ownership and heightened