|
Entity |
Limited Liability Company |
S Corporation |
C Corporation |
Partnership |
|
Description |
An LLC
can only be formed by filing articles of organization with the
California secretary of state. Owners are called members and the LLC may
be managed by the members, similar to a partnership, or by managers
selected by the members, similar to a corporation. Treated as a
partnership for tax purposes unless contrary election is made. |
Nontax
formalities for formation are identical to C corporation (i.e., filing
of articles of incorporation with the California secretary of state).
Assuming all the requirements for election are satisfied, shareholders
are taxed instead of corporation. Income from business subject to single
level of taxation. |
A
corporation is formed by filing articles of incorporation with the
California secretary of state. Absent an election by the shareholders be
treated as S corporation, income from business may be subject to double
taxation at entity level and again on distribution to the shareholders. |
A
general partnership may be formed without any governmental filing by
oral or written agreement. A limited partnership can only be formed by
filing a certificate of limited partnership with the California
secretary of state. Partners are taxed instead of partnership. Income
from business subject to single level of taxation. Limited partners have
limited liability for debts of the business and income is not taxed at
entity level. |
|
Liability for
Entity Debts |
Members
have limited liability for debts of the business. |
Shareholders have limited liability for debts of the business. |
Shareholders have limited liability for debts of the business. |
General
partners have unlimited liability for the debts of the business while
limited partners have limited liability. |
|
Participation in
Management |
Flexibly
determined by members in operation agreement. Members can participate
directly in management of the business or may elect to delegate
authority to one or more managers. |
See C
corporation. |
Directors and officers have responsibility for the management of the
business; shareholders generally are not entitled to actively
participate in management unless they are directors or officers or an
election is made to operate as a statutory close corporation. |
General partners
have the exclusive right to manage the business; limited partners'
rights are restricted to preserve limited liability. |
|
Transferability
of Interests |
Securities law
restrictions on transfer and restrictions may also be imposed in the
operating agreement. A member may assign right to distributions, but the
assignee can only become a member if other members consent as provided
in operating agreement. |
Securities law
restrictions on transfer and restrictions may also be imposed in the
shareholders agreement, if any. Shareholders may also agree not to make
any transfers that would lead to termination of S corporation status. |
Securities law
restrictions on transfer and restrictions may also be imposed in a
shareholders agreement, if any. |
Securities law
restrictions on transfer of limited partnership interests and
restrictions may also be imposed in the partnership agreement. A partner
may assign right to distributions, but the assignee can only become a
partner if other partners consent as provided in the partnership
agreement. |
|
Preferences Among
Owners |
Substantial
flexibility to create preferences with respect to distributions and
allocations in the operating agreement; however, allocations must have
"substantial economic effect." |
Very limited due to
inability to create more than one class of stock. |
Substantial
flexibility through use of various classes and series of preferred
stock. |
Substantial
flexibility to create preferences with respect to distributions and
allocations in the partnership agreement; however, allocations must have
"substantial economic effect." |
|
Term |
Determined by
operating agreement. |
Perpetual. |
Perpetual. |
Determined by partnership agreement. |
|
Securities Issues |
Membership interests are generally considered to be securities. |
Shares
of stock are securities. |
Shares
of stock are securities. |
Limited
partnership interests are considered to be securities, while general
partnership interests are not. |
|
Entity Level
Federal Income Taxes |
No
federal tax at LLC level unless LLC elects to be taxed as corporation. |
Generally no tax at S corporation level; some excise taxes, and built in
gains taxes may apply. |
Income
tax on earnings at corporate level. |
No
federal tax at partnership level. |
|
Number of
Required Owners |
Most
states now allow an LLC to be formed with any number of members,
including just one member. |
No more
than 100. |
Any
number. |
At least
two. |
|
Eligibility
Requirements of Owners |
No
restrictions. Can be owned by an Individual, S Corporation, C
Corporation, Limited Partners, or another LLC. |
US
citizens or resident individuals, certain trusts, and certain tax exempt
entities. An S Corporation may own another S Corporation – however, must
be the only owner. C Corp or LLC may not own an S Corporation. |
No
restrictions. Can be owned by an Individual, S Corporation, C
Corporation, Limited Partners, or LLC. |
No
restrictions. Can be owned by an Individual, S Corporation, C
Corporation, Limited Partners, or LLC. |
|
Entity Level
State Taxes |
While
LLC is generally not subject to an entity level tax, California imposes
a fee at the entity level based on income of LLC reportable in
California, as well as an annual minimum franchise tax. |
As at
federal level, generally no tax at S corporation level; but California
does impose a corporate level tax on S corporations at lower rates than
that imposed on C corporations. |
As at
federal level, income is taxed at corporate level. |
While
partnerships are generally not subject to an entity level tax,
California imposes an annual minimum franchise tax fee on limited
partnerships. |
|
Tax on
Distributions of Appreciated Property |
Generally, no tax to either LLC or member (certain exceptions apply). |
Taxable
gain on distribution passed through to shareholders. |
Taxable
gain to corporation and dividend to shareholders. |
Generally, no tax to either partnership or partner (certain exceptions
apply). |
|
Special
Allocations of Income or Deduction |
Allowed,
subject to substantial economic effect rules. |
Not
allowed - all allocations are pro rata. |
Not
allowed. |
Allowed,
subject to substantial economic effect rules. |
|
Distribution
Preferences |
Allowed. |
Not
allowed - one class of stock requirement. |
Preferred stock allowed. |
Allowed. |
|
Deductibility of
Losses by Owners |
Members
may deduct their shares of losses to extent of basis, which includes LLC
level debt (certain other limitations apply). |
Shareholders may deduct their shares of losses to extent of basis, which
does not include corporate level debt. |
No
deduction at shareholder level. |
Partners
may deduct their shares of losses to extent of basis, which includes
partnership level debt (certain other limitations apply). |
|
Fiscal year |
Generally calendar. |
Generally calendar. |
No
restrictions. |
Generally calendar. |
|
Status of Owner/
Employment |
Not
clear, but more likely treated as self-employed. |
If
ownership interest is greater than 2%, then treated as self-employed. |
Treated
as employees; therefore entitled to § 105 (accident and health) § 101
(death benefits) § 125 (cafeteria plans) § 119 (meals/ lodging). |
Self-employed. |
|
Self-Employment
and Social Security Taxes |
Earnings
generally subject to self-employment taxes, except for earnings from
passive investment type interests. |
Social
security taxes imposed on wages of employee-owners/no self-employment
tax on distributions. |
Social
security taxes imposed on wages of employee-owners/no self-employment
tax on distributions. |
Earnings
generally subject to self-employment taxes, except for earnings
attributable to limited partnership interests. |
|
Nontaxable Fringe
Benefits (group health insurance, accident or health benefits, meals or
lodging, cafeteria plan benefits) |
Cash
value of fringe benefits generally not excludable from member's income
or deducible by LLC. |
Cash
value of fringe benefits generally not excludable from
shareholder—employee's income or deductible by S corporation. |
Deductible by corporation—not included in income of
shareholder—employee. |
Cash
value of fringe benefits generally not excludable from partner's income
or deductible by partnership. |
|
Termination on
Transfer of Interests |
LLC
terminates for tax purposes on transfer of 50% or more of capital and
profits in 12 months. |
No
termination of entity on transfer of interests. |
No
termination of entity on transfer of interests. |
Partnership terminates for tax purposes on transfer of 50% or more of
capital and profits in 12 months. |
|
Increase in Basis
for Debt |
Members
increase outside basis by share of LLC debt. |
No
increase in basis in stock for corporate level debt. |
No
increase in basis in stock for corporate level debt. |
Partners
increase outside basis by share of partnership debt. |
|
Conversion to
Another Entity |
Generally may be incorporated (by conversion or otherwise) tax free
(certain exceptions apply). |
Can
convert to C corporation by revoking election; may be tax on converting
to LLC. |
Can
convert to S corporation by making election (built in gains tax may
apply to later dispositions of appreciated property). Conversion to LLC
may be taxable. |
Easily
converted to LLC or generally may be incorporated tax free (certain
exceptions apply). |
|
Taxes on Sale or
Liquidation |
One
level of tax on sale of stock or assets, generally capital gain except
for amount allocable to certain assets. |
One
level of tax on sale of stock or assets, generally capital gain on stock
sale. |
Potential double tax. Corporate tax on sale of assets. Shareholder level
tax on sale of stock or liquidation. |
One
level of tax on sale of stock or assets, generally capital gain except
for amount allocable to certain assets. |
|
Exit Strategy |
Superior
for: (a) asset sales—gains subject to single tax; (b) liquidation—not a
taxable event. NOTE: Easy to convert from LLC to C corporation—difficult
to go the other way. |
See C
corporation. |
Superior
for: (a) public offering but can start as LLC and convert later
(however, may be taxable); (b) stock sale may be eligible for 1202
treatment; (c) tax-free reorganization (e.g., merger). |
See LLC. |
|
Ease and Expense
of Organization |
Can be
relatively high if many members and preferences. Requires more tax
planning. |
Medium. |
Medium,
unless preferred stock in which case expenses can increase. |
See LLC. |
|
Licensing Under
California Department of Real Estate |
Cannot
be licensed. |
Yes. |
Yes. |
As long
as each individual possesses a broker license, you may be licensed under
DRE. |
|
Licensing Under
California Department of Corporations |
Consumer Finance Lender:
Yes
California Mortgage Lending Act:
Yes |
Consumer Finance Lender:
Yes
California Mortgage Lending Act:
Yes |
Consumer Finance Lender:
Yes
California Mortgage Lending Act:
Yes |
Consumer Finance Lender:
Yes
California Mortgage Lending Act:
Yes |
