There are countless business operations in California that have grown to a point of owners needing to reevaluate the company business format. A “doing business as” declaration will no longer suffice for these managers. Likewise there are many potential entrepreneurs who have envisioned a new business that they want to solidify from the very beginning. Making this decision takes planning and forecasting with respect to future company direction, and especially regarding tax liability. There are effectively three general types of corporations for business owners to choose from.
Major business operations that will be selling stock and operating as a totally separate financial entity are the traditional C corporation. These corporations have separate tax liability from the actual owners, so there will be a dual taxation application. However, corporate tax liability can be reduced when the profits are distributed to shareholders who then pay capital gains taxes. From a business law perspective, C corporations are optimum for owners who need liability shielding in the event that the corporation is involved in a legal dispute.
S corporations are typically business entities with minimal owners who issue themselves a certain amount of stock to designate ownership percentage. They are effectively pass-through business entities with respect to taxes, but shareholders are still exempt from personal liability when lawsuits are filed against the corporation. This business format is effective for avoiding dual taxation, but the shareholders still absorb the whole tax liability based on their individual personal financial gain.
Organizations may also incorporate as 501 (C3) corporations as well, but this designation is reserved for charitable organizations that accept donations and conduct benefits for specific charities. Many businesses will actually opt for a partnership of some type or a limited liability company that consists of members as opposed to shareholders in a corporate format.