legal, business-registration, business-structure, californiaTwo of my colleagues and I want to start an organizational management/ program evaluation consulting business but are unsure which business type to form. We reviewed all of the advantages and disadvantages of and LLC, S and C-Corp but are unclear on a couple of things. First, if we elect to have an S or C-Corp, can we serve as the board of directors for our company and owners given that we will still be relatively new? Second, can we convert an LLC to a C or S-Corp if we feel we need to in the future? Lastly, as far as tax structure as a small start up is concerned, does any one type have an advantage over the other? We live in California and are aware the state charges a hefty franchise tax.
You can start up as an LLC and then elect to be taxed as a corporation, either S or C corp.
One thing to be aware of is that if you go the LLC route and do not elect to be taxed as a corporation, you will be subject to California's LLC gross receipts tax. And if you elect to go the S-corp route, there's a 1.5% tax on net profits.
So it might be worthwhile to estimate the taxes as an LLC with the gross receipts tax vs 1.5% of net as an S corp. But that's only one consideration, and you should get tax accountant and business lawyer to help you set up and pick the best entity for your situation.
First, if we elect to have an S or C-Corp, can we serve as the board of directors for our company and owners given that we will still be relatively new?
Yes.
Second, can we convert an LLC to a C or S-Corp if we feel we need to in the future?
Yes. In fact, you can only do it for tax purposes, keeping the legal entity LLC, and that would be even easier than converting the entity itself.
Lastly, as far as tax structure as a small start up is concerned, does any one type have an advantage over the other? We live in CA and are aware the state charges a hefty franchise tax.
Yes. The franchise tax is the same (and you cannot avoid it, if you incorporate in a different State, the FTB will find out, from your tax returns, and will chase you down for the fee for all the years).
However, the income tax treatment is different for LLC and S-Corp. Both, by the way, pay income tax in California. You should talk to a tax adviser (CA-licensed CPA or EA) and an attorney to know which entity is best for you from both legal and tax perspectives. Do not try to save money on this since it will cost you more later to fix mistakes.
Efstevens, I myself am also in California however my C Corp. and Series LLC are from Delaware - remember that you don’t necessarily have to incorporate from the state that you live in.
Thanks to Vermont soon the V Corp. (Virtual Corporation) will probably start to become more popular and take over. I am actually in a similar field of business to the one that you and your colleagues are going to starting up your consulting business so I would love to talk to you privately a bit more ‘in depth’ about some things, feel free to email me or G+ chat.
As per your question, there are several different things that you could do. You just have to decide which makes more sense for you and your partners.
If there is at this point only going to be three of operating and owning the consulting firm you could do an a S corp. which would prevent double taxation. You would do so by first becoming a C Corp. and then filling out the correct IRS form, change your status to S Corp.
Alternatively, you could do an LLC or you could do both by creating an LLC Holding Company and then making that company the primary shareholder of your actual operating company (Business Consulting firm) which you could incorporate as either a Corp. or S Corp. of another LLC.
However if you want to minimize your risk/liability as well as corporate taxes if you do another LLC you might as well do a Series LLC which allows you to create multiple LLCs each functioning semi-independently without affecting the others.
In series LLCs, the different LLCs can even be run by other people which depending how you and your partners were planning to run things in you consulting firms might be ideal because you can each run separate LLCs as ‘Divisions’ of the business i.e. administrative, accounting, sales, marketing, consulting, personal/HR.
Just make sure that you also whole equal shares of the Primary LLC or the Holding Company LLCs.
I should also point out that although California does not offer series LLCs itself, it does currently recognize and allow series LLCs from other states to do business and operate in California.
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