Question

What are the tax benefits and personal liability issues to consider when you’re starting a business in California?

Gregory A. Nylen

Answered by:
Gregory A. Nylen

Located in Murrieta, CA
Lobb & Plewe, LLP

Gregory A. Nylen - Intellectual Property Litigation - Super Lawyers

Answered by: Gregory A. Nylen

Lobb & Plewe, LLP
Murrieta, CA
Phone: 951-788-9410
Fax: 951-788-0766

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Answer

Forming a business is stressful for a lot of reasons, not least of which because the implications of the choices you make now can last as long as the business does. You can sometimes change business entity type, or shift liability using certain measures, but overall, it is best to consider how three things will affect your tax structure and personal liability: the type of entity you choose, how it’s taxed and the liability implications. 

  1. Type of entity: traditional C corporation, or pass-through

Traditionally, many businesses have chosen to form as what’s called “C corporations” or “C-corps”. These types of corporations limit the owner’s personal liability, but have a major downside: they are taxed separately from their owners. If a C-corp is owned by one individual, they are then paying double taxes: once on the company, and once on their own personal income. 

For this reason, pass-through businesses are now much more popular. These are called “pass-through” because they pass their gains and losses right through to the owner. The owner is taxed only on their own income. Common pass-through business types include sole proprietorships, partnerships, limited liability company (LLC) and S corporations (S-corp). 

    2. How it’s taxed (if applicable)

In some cases, you can elect to be taxed as a different type of entity than you are. For instance, an LLC is generally taxed as a partnership but may choose to be taxed as an S- or C-corp. Why you would choose to do one or the other really depends on your exact situation. Your lawyer can help you talk through why you may want to be double taxed in a C-corp or avoid that with a pass-through S-corp. 

    3. Liability with regard to assets

You can structure your business in such a way to protect your personal assets, for instance, with an LLC. An LLC mirrors the liability protection of a C-corp: only business assets are used to pay business debts, which means that your personal assets will never be taken by creditors of your company. It combines this liability protection with the benefit of pass-through taxation, meaning that owners are only taxed once. However, fully utilizing an LLC’s protection requires some thought as you operate your business. It is important not to mix your personal and business assets: if you do, you are potentially opening the door to personal liability for business debts. 

Finding The Right Business Structure For You 

There are so many things to consider when forming a business. Which type of entity, taxation and liability protection you will use will all depend on your short-term situation as well as your long-term goals. A good business attorney can help you evaluate your needs and choose the right arrangements to protect you and help your business thrive.

Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.

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