Incorporating a business is a move many business owners take when they want to protect their interests by establishing the company as an entity that is legally separate from themselves. Should you decide that setting up an S corp is the best entity choice for you, you might be wondering how to set up an S corp in California. In this article, we will shed some light on the topic by going over answers to the questions business owners looking to incorporate usually ask, with main focus on S corporations.
What does incorporated business mean?
An incorporated business or a corporation is a business type that comes with many benefits, making it the business structure of choice for both veteran and beginner business owners. Unlike in the case of sole proprietorship or partnership, an incorporated business grants its owner tax deductions and liability protection as it limits the owner’s liability for business obligations.
Setting up a corporation is an advisable course of action if your small business has skyrocketed after being in existence for some time. Although you want to avoid making rash decisions, you do want to stay ahead of the curve. To do that, you need to think big. Setting up a corporation is one way to do that.
A corporation can take the form of one of the following:
- S corp,
- C corp or
- limited liability company.
As far as requirements go, incorporating a business costs money, although the advantages of setting up a corporation outweigh these costs. A corporation also comes with various obligations that concern recordkeeping and annual reporting. Of course, all of these can be delegated to experienced professionals so there is no involvement on your part.
What are the benefits of a corporation?
Incorporation gives you the opportunity to increase your capital by sharing the company shares. You can also easily transfer your shares in the business to other owners, which is excellent if you want to attract outside investors or if you ever decide to sell the business.
Last but not least, a corporation has permanent existence, meaning it continues to exist even after the original founders leave the company. An incorporated business also outlives its original founders.
Either way, consulting professionals specializing in taxation should be your initial course of action so you can decide if a corporation is the best scenario in your particular case and if the tax consequences of incorporating are favorable or not.
How does an incorporated business work?
By turning your sole proprietorship or general partnership into an incorporated business will render the company formally recognized by the state where the business is incorporated. A corporation becomes its own legal business structure. In other words, the individuals who founded the business originally are protected from personal asset loss and other risks.
Since the corporation is legally separate from the owners, it can take certain actions that would otherwise be taken by the owners: own property, sign contracts, open bank accounts, initiate lawsuits and so forth.
Is an incorporated company public or private?
This decision is entirely up to you. The key difference concerns the availability of the company’s shares. Depending on the choice you make, different implications apply.
Private companies are owned by a small number of shareholders and the company stock is owned, traded and offered privately, although over-the-counter exchange is possible as well.
Public companies, on the other hand, are owned by the general public and the shares are offered to the general public. Trading shares is free and it may be done through the stock exchange or over-the-counter.
Why opt for an S corp?
The main benefit of an S corp is that business owners are not required to pay the self-employment tax. S corp is an exceptionally good choice for service-oriented and consultancy businesses. These are businesses which do not require heavy investment of money and other resources, have low start-up costs, minimum initial purchases and favorable financial prospects.
How to set up an S Corp in California efficiently? Right this way
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We have what it takes to guide you through the process of setting up your own business as well as advise you on the best entity for you. We have helped countless clients set up their S corps in California and we can help you, too! Call today!