California tax attorney Blog

Articles Posted in Business Transactions

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When beginning a business in California, you must decide what form of business structure to create. For federal tax reporting purposes, your form of business determines which income tax return form you have to file with the IRS. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. Tax and legal considerations enter into selecting a business structure.

LLCs – limited liability companies – are also available in California. The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return. A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

A California LLC generally offers liability protection similar to that of a corporation but is taxed differently. Domestic LLCs may be managed by one or more managers or one or more members. In addition to filing the applicable documents with the Secretary of State, an operating agreement among the members as to the affairs of the LLC and the conduct of its business is required. The LLC does not file the operating agreement with the Secretary of State but maintains it at the office where the LLC’s records are kept.

The Government Proposes To Increase Certainty With Respect To Worker Classification

Current Law

For both tax and nontax purposes, workers must be classified into one of two mutually exclusive categories: employees or self-employed (sometimes referred to as independent contractors).

California became the seventh state to adopt two new subtypes of stock corporations – a “flexible purpose corporation” and a “benefit corporation” as of January 1, 2012. Now, investors and entrepreneurs can pursue both social and economic objectives allowed by the new corporation subtypes. These two types of new entities may sound like marketing hype but they help shield them against lawsuits brought by shareholders who say that company do-gooding has diluted the value of their stock.

The new stock corporation subtypes differ from traditional for profit corporations that are organized to pursue profit and nonprofit corporations that must be used solely to promote social benefits.

Entrepreneurs who wanted to incorporate social causes or green initiatives often had to become non-profits which limited their ability to raise venture capital.

Nevada Once Again Leads the Way in Debtor-Friendly Legislation

In his recent article describing the benefits of using a Nevada LLC as an asset protection tool, Jacob Stein wrote all of the following:

The laws of the 50 states aren’t uniform when it comes to shielding or exposing a debtor’s assets from the claims of creditors. For example, some states fully expose a debtor’s residence to a creditor. Other states, such as Florida and Texas, provide a complete homestead exemption. But no state beats Nevada when it comes to consistently and aggressively enacting legislation designed to assure that a debtor’s assets remain with the debtor and out of the clutches of creditors.

The IRS has an informative online resource for business owners in California counties of Los Angeles, Orange and Ventura that is worth reviewing before starting a new business. It is also a good review for existing businesses. Below is a list of topics covered by the IRS:

Business Forms and Pubs

This is a list of IRS Tax Publications for Business.

In California, since different laws may be involved in a particular employment situation, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law.

Not all workers are employees as they may be volunteers or independent contractors.

Employers sometimes improperly classify their workers as independent contractors so that the employers are not liable for payments under disability insurance, unemployment insurance, or social security. And, treating a worker as an independent contractor means the employer does not have to pay payroll taxes, the minimum wage or overtime. Finally, not treating workers as employees means the employer does not comply with other wage and hour law requirements and does not have to cover independent contractors under workers’ compensation insurance.

Here are a few links – which is not all-inclusive – to basic federal tax information for people who are starting a business, as well as information to assist in making basic business decisions. Other steps may be appropriate for your specific type of business.

Checklist for Starting a Business

Selecting a Business Structure (Sole Proprietorships, Partnerships, Corporations, S Corporations, Limited Liability Company (LLC))