Q:

What is the difference between a C corporation and an S corporation?

A:

S-Corporation

An S corporation is a corporation formed under state civil law or any business entity (such as a partnership or LLC that elects to be taxable as a corporation for tax purposes) that elects under federal law to be taxed under Subchapter S of the Internal Revenue Code. An entity that has elected to be taxable as an S corporation for federal tax purposes is also treated as an S corporation for California tax purposes. An S corporation generally offers liability protection to its owners (shareholders) and is a conduit where the profits or losses of the S corporation flow through to the shareholders, partners, or members. Liability of the owners for debts and obligations of the business depends on what type of entity the S corporation is under state civil law, e.g. corporation, partnership, or LLC.

Key Features

  • An entity must elect to be treated as an S corporation and is limited by the types of owners, which may not exceed 100 shareholders.
  • An S corporation does not pay federal income tax.
  • Under California law, the S corporation is subject to a 1.5 percent tax on its net income and is a conduit similar to a partnership.
  • The items of income, deductions, and credits flow through from the S corporation to each shareholder through the California Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc. Each shareholder is responsible for paying taxes on their pro rata share of the S corporation’s items of income, deductions, and credits.
  • A separate bank account and separate records are required with this form of entity.
  • The management structure of the S corporation will depend upon what type of entity it is under state civil law, e.g. corporation, partnership, or LLC. The shareholders of the corporation are not liable for the losses of the business, and creditors may only look to the corporation and its business assets for payment.
  • S corporations are subject to the annual $800 minimum franchise tax.

C Corporation

A corporation is an entity formed under state civil law that is a separate legal entity owned by shareholders. A corporation is generally taxed under Internal Revenue Code, Subtitle A, Chapter 1, Subchapter C, unless it elects to be taxed under Subchapter S. Corporations taxed under Subchapter C (C corporations) are taxed annually on their earnings, and the shareholders are taxed on these earnings when distributed as dividends. If the corporation is a service corporation by an employee-owner, see FTB 1123, Forms of Ownership, for more information regarding personal service corporations.

Key Features

  • Except for taxation purposes, a C corporation is treated like an S corporation.

Q:

What is the difference between an LLP and LLC?

A:

Limited Liability Partnership

An LLP, or Limited Liability Partnership, is a form of ownership in which all the partners receive limited liability protection. However, an LLP is similar to a general partnership in that all the partners can take an active role in managing the day-to-day affairs of the business. The LLP form of ownership is limited in the State of California to persons licensed to practice in the fields of public accountancy, law, or architecture. In addition, per recently chaptered SB 284, engineers and land surveyors are also included in the professions that can be formed as an LLP until January 1, 2019.

In order to form in California, an LLP must first register with the California Secretary of State. An LLP formed in another state must register with the California Secretary of State prior to conducting business in the state.

Key Features

  • The LLP is a flexible form of business.
  • It is designed primarily for specific professional services.
  • The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.
  • The items of income, deductions, credits, and shares of property, payroll, and sales flow through from the partnership to each partner’s California Schedule K-1.
  • Each partner is responsible for paying taxes on their distributive share.
  • The LLP allows each partner to actively participate in management affairs.
  • The LLP provides limited liability protection to each partner.
  • A LLP remains in effect based on partners agreeing to a termination date.
  • LLPs do not pay income tax but they are subject to the annual tax of $800.

Limited Liability Company

An LLC, or Limited Liability Company, is a hybrid business entity that blends elements of partnership and corporate structures. The LLC’s main advantage over a partnership is that, like the owners (shareholders) of a civil law corporation, the liability of the owners (members) of an LLC for debts and obligations of the LLC is limited to their financial investment. However, like a general partnership, members of an LLC have the right to participate in management of the LLC, and profit or losses flow through to its members. Certain types of businesses that provide professional services requiring a state professional license, such as legal or medical may not form an LLC. For California income tax purposes, an LLC will be classified as a partnership if it has more than one owner and will be treated as a disregarded entity if it has only one member. However, an LLC is allowed to elect to be treated (taxed) as a corporation. To be taxed as a corporation, the LLC files an election on Federal Form 8832, Entity Classification Election, with the Internal Revenue Service. California conforms to the federal entity classification regulations commonly known as "check-the-box regulations" that allow an LLC to elect to be taxed as a corporation.

Key Features

  • An LLC is a hybrid business entity that can be treated as a partnership, but it has the limited liability protection under civil law. 
  • An LLC is formed by filing "articles of organization" with the California Secretary of State prior to conducting business. An out-of-state LLC that conducts business in California should register with the Secretary of State. 
  • Forming an LLC is simpler and faster than forming and maintaining a civil law corporation.
  • Either before or after filing its articles of organization, the LLC members must enter into a verbal or written operating agreement. A formal, written agreement is advisable.
  • Its members typically manage an LLC, unless the members agree to have a manager handle the LLC’s business affairs.
  • An LLC may have one or more owners, and may have different classes of owners. In addition, an LLC may be owned by any combination of individuals or business entities.
  • If the LLC has more than one owner, it will be treated as a partnership (subject to Subchapter K), unless it elected to be treated as a corporation. The items of income, deductions, and credits flow through from the LLC to each member’s California Schedule K-1, Members’ Share of Income, Deductions, Credits, etc., and distributive shares of property, payroll, and sales. Each member is responsible for paying taxes on their distributive share. If the LLC has a single member, it will be treated as a disregarded entity, and it will be treated as a sole proprietorship or a division of its owner, unless it elects to be taxable as a corporation.
  • A husband and wife owning an LLC may elect to be treated as a partnership or a disregarded entity.
  • If the LLC elected to be taxed as a corporation, it is subject to corporation tax law and filing requirements.
  • In general, all the owners (members) are shielded from individual liability for debts and obligations of the LLC.
  • LLCs do not issue stock and are not required to hold annual meetings or keep written minutes, which a corporation must do in order to preserve the liability shield for its owners. 
  • Either before or after filing its articles of organization, the LLC members must enter into a verbal or written operating agreement. A formal, written agreement is advisable. Its members typically manage an LLC, unless the members agree to have a manager handle the LLC’s business affairs.
  • Generally, members of an LLC that are taxed as a partnership may agree to share the profits and losses in any manner in compliance with Subchapter K. Members of an LLC classified as a corporation receive profits and losses in the same manner as shareholders of a corporation legally organized as such.
  • An LLC’s life is perpetual in nature. However, the members may agree to a date or event of termination.
  • LLC do not pay income tax but they are subject to the $800 annual tax and a fee.

Q:

Are there differences between LLCs and LLPs in terms of taxation?

A:

Yes. LLPs are taxed like partnerships, with company profits shared equally among partners. By passing the profits on to the partners, the company avoids paying federal taxes on its profits.

LLCs are taxed in the same way, but they also have the flexibility to choose to be taxed as a corporation, in which case company profits in excess of the members’ salaries are taxed at the corporate level.

Q:

What is the difference between a Last Will and Testament and a Inter Vivos (Living) Trust?

A:

A Inter Vivos (Living) Trust is a vehicle used to hold, administer, and eventually transfer assets (i.e. property) to beneficiaries without the need of going through Probate. While a Last Will and Testament, which indicates how you would like your assets to pass, can be used to transfer property, it will usually require a Probate proceeding to gain court approval for such transfers, subject to some exceptions (ie: an estate valued at less than $150,000 may be able to avoid a formal Probate by filing an Affidavit for Transfer of Assets of Decent under CA Probate Code §13101). However, we recommend always having a "pour-over" Will to go along with your Trust, so that any assets which were inadvertently left outside of the Trust, will be transferred to the Trust upon your death and distributed pursuant to the terms of the Trust.

In addition, upon your death your Last Will and Testament is filed with the Superior Court and becomes a matter of Public Record, whereas the terms of an Inter Vivos Trust will only be disclosed to the beneficiaries.

Q:

What does “power of attorney” mean?

A:

A “power of attorney” is a legal document granting authority to an individual, your "Agent," granting he or she the ability to make financial decisions decisions on your behalf should you become incapicitated. You can elect to grant some or all powers to your Agent and choose whether you want it to take effect immediately or upon your disability.

Q:

What is escrow?

A:

The term “escrow” refers to a situation  wherein a third party intermidiary holds and distributes money and/or documents on behalf of the contracting parties, pursuant to the conditions set forth in the agreement. An escrow can be used, for instance, in the purchase of a business or a home, where the Seller/Buyer has to perform certain conditions for the sale to go through, but does not want to do so without some assurances that the other party will also perform (ie: the Buyer's funds being deposited into an escrow account). In such a case, when the Seller/Buyer fully satisfies all of the conditions, the escrow agent will release the documents and/or funds to the respective parties and the transaction will be complete. 

Q:

What are easements?

A:

An easement is defined to be a liberty privilege or advantage, which one man may have in the lands of another, without profit; it may arise by deed or prescription. The right to use the property of another for a specific purpose, for example, the common right of way which allows a neighbor to use a shortcut through the adjoining land which has been used for many years. Owners of real estate typically grant easements for the placement of utility poles, water pipes or lines, electricity and the like. The owner of property that is burdened by the easement since even he or she cannot interfere with its use.

Q:

What is an Advanced Health Care Directive?

A:

An Advanced Health Care Directive is a legal document in which a person designates an "Agent" to act on their behalf regarding medical decisions if you are unable to do so yourself.  An advanced health care directive can specify what actions should be taken including, but not limited to, artificially prolonging life, donation of body parts after death, burial v. cremation, and your desire to stay at home instead of going into a convalescent home, if possible.

Q:

What role does proposition 13 play in terms of California’s tax collection?

A:

After Proposition 13 was passed, property tax value was rolled back and frozen at the 1976 assessed value level. Property tax increases on any given property are limited to no more than 2% per year as long as the property is not sold.

Q:

How much is the annual tax exemption (i.e. annual exclusion) regarding gifts?

A:

In 2018, the annual tax exemption is $15,000.

Attorney Marc A. Bronstein has been representing West Los Angeles for over 30 years in cases involving real estate, taxation, estate planning and business law. Call him today to schedule your consultation.