California corporations can be complicated and cumbersome, but they can also be worth it, depending on your goals. Before forming a corporation, make sure you know all the pros and cons, and ask yourself the following questions:
● Do I need limited liability?
Limited liability protects the owners’ assets from business liability. Whether limited liability is a good choice for you depends on the risk, your personal assets, and your risk tolerance. Corporations provide limited liability.
● Do I need stock?
Many small business do not need to issue stock, but if you have goals for your business that would require stock, such as offering stock options to your employees, going public, getting investors, or dramatic scaling, then stock might be a good idea.
● What are my long-term goals for the business?
Investors tend to prefer corporations, going public requires stock, and dramatic scaling can be easier with a corporation. Even smaller long-term goals such as passing the company to your children or making sure it’s protected in your estate plan can affect whether a corporation is a good business entity for you. Make sure you know your goals in advance and discuss them with your attorney and other advisors before making a final decision on business entity type.
● What are the tax implications?
Corporations are generally taxed as a separate entity from their owners. This often leads to higher tax obligations overall, as the profits get taxed once coming into the company, and then taxed again as profits are paid to the owners (this is what they call “double taxation”). Talk to your attorney and a good CPA about the tax implications of the potential entity types to find out which tax scheme would be best for your business. Even if a corporation would mean higher taxes, it still may be worth it depending on your long-term goals overall.
● Am I willing and able to do the upkeep?
Corporations have a lot of legal requirements for structure and upkeep. A corporation is required to have three groups of people to govern it: 1) stockholders (the owners), 2) a board of directors (to make the large decisions), and 3) officers (to make the day-to-day decisions). A single-owner company can have the same person be the sole stockholder, board member, and officer all at once, but even then, that person must wear the three different hats separately. Corporations are also required to have annual meetings of the stockholders and the board (again, even if that’s just a single person!), keep written records of all minutes and major decisions, and keep a corporate records book that includes all of the records. Failure to do this ongoing upkeep can end in losing your limited liability, and there goes the entire purpose for having a corporation to begin with!
Corporations can provide huge benefits if they are a right fit for you. However, the risk of accidentally choosing the wrong entity, forming it incorrectly, or failing to maintain your corporate requirements can have massive negative effects on your business. If you need help deciding whether a corporation is right for you, creating your entity and formation documents, and keeping your minutes and meetings up to date, contact us or book an appointment today.