If you are operating your business in California, registering your business in California is one of the smartest business decisions you can make.
Making your business a Limited Liability Company (LLC) or a Corporation offers numerous benefits and immediately sets you up for success.
Let’s first understand what registering a business means and highlight the different forms of business registration…
What is Business Registration?
Business registration means forming a Limited Liability Company (LLC) or Corporation for your business.
When you register your business, you make your business a separate legal entity.
What this means is that you and your business are separate entities with different rights and obligation. Making your business a separate legal entity should be one of your primary goals in business.
Both LLC and Corporation provide their owners with limited liability for company debts. This means that your personal assets remain untouchable to cover business debts, claims or lawsuits to the extent than what you invested in the company.
This means that if something happens to your LLC or Corporation, your personal possessions, such as car or home, can’t be touched by creditors — this is great great because LLCs and Corporations offer the most personal liability protection if your gets sued or if something happens to your business where you will be liable.
What are the Different Types of Business Registrations?
In California, you can either register your business as a Limited Liability Company (LLC), C-Corporation, or S-Corporation.
Your choice largely depends on the vision, goals, and strategy you have for your business.
Here is a quick summary of the top 3 most popular business registration types and their advantages:
Limited Liability Company (LLC)
LLC is most common form of business registration.
LLC provides its owners with limited liability for company debts. This means that your personal assets remain untouchable to cover business debts, claims or lawsuits to the extent than what you invested in the company.
This means that if something happens to your LLC, the owner’s personal possessions, such as car or home, can’t be touched by creditors. So the owners of an LLC have no personal liability for the obligations of the LLC.
Unlike corporations, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns.
Corporation is also an independent legal entity, separate from the people who own, control, and manage it.
Corporations can enter into contracts, incur debts, and pay taxes apart from its owners. In other words, the Corporation itself, not the shareholders who own it, is held legally liability for the actions and debs the business incurs.
However, corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.
S-Corporation is a special type of corporation created through an IRS tax election.
An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. What makes the S Corporation different from a traditional corporation (C Corporation) is that profits and losses can pass through to your personal tax return.
Consequently, the business is not taxed itself. Only the shareholders are taxed.
S-Corporation eliminates double taxation of your income, provides you with more investment opportunities, and allows you to file your tax only once a year.
To be considered an S-Corporation, you must first form a business as a C-Corporation in the state where it is headquartered then file to classify it as an S-Corporation with the IRS.
How to Decide Which Business Type is Right For You
A business lawyer can help you decide which business type is right for you: Limited Liability Company (LLC), C-Corporation, or S-Corporation.
It is always advisable to discuss your business goal, vision, and strategy with your lawyer so he or she can help you choose the right type of business registration.
A good lawyer will help you make these decisions. At Mollaei Law, we are equipped to assist you in choosing the right option.
If You are Doing Business in California, Be Sure to Register
Sometimes business owners and entrepreneurs think they can avoid California registration fees and taxes by forming their business entity in another State. However, this belief is incorrect.
If you are doing business in California, then you must register with the California Secretary of State, even if the LLC or Corporation was formed in another state.
What does “Doing Business in California” Mean?
So what constitutes “doing business” in California?
The term “doing business” is defined as “transacting interstate business.” This term is defined as “entering into repeated and successive transactions of its business in this state.” (See Section 17708.03(a) for Limited Liability Companies and Section 191(a) for Corporations).
So what this means is that any company that has registered their business (formed their LLC or Corporation) outside of California but is headquartered or doing business in California is likely to enter into “repeated and successive transactions” with customers, suppliers, and other parties that are located in California.
This also holds true if you have an online business that is operating its business online but if you are located and doing business in California, you will need to make sure to register your business in California.
If you are a Corporation and you do not register your business in California before transacting business, you may face financial penalties subjection to Section 2203.
What If I’m Operating an Online Business Located in California with No Physical Locations in California, Do I still Have to Register to Do Business in California?
I’m often asked, “If I register a business that will be located in California and will be strictly online, with no physical office location, do I still have to register to do business in California?
Before you even get your first client, the California Franchise Tax Board requires that all LLCs and Corporations to pay an annual $800 Franchise Tax if you:
- Incorporate or register an LLC or Corporation in California
- Foreign qualified or registered to do business in California
- Or doing business in California, whether or not incorporated, organized, qualified or registered under California law
Also, business entities are required to pay the minimum Franchise Tax whether you are active, inactive, or operating at a loss.
Therefore, even if you are operating an online business with no physical principal office or location in California, you will need to register your LLC or Corporation in California and file for Foreign Foreign Qualification in California.
If you need to register your LLC or Corporation in California, contact me, Sam Mollaei, Esq., business lawyer.
How to Register Your Business in California
If you are looking to register your business in California by forming a Limited Liability Company (LLC), C-Corporation, or S-Corporation, contact me, Sam Mollaei, Esq., and I will help you register your business.
Why You Should Register Your Business in California
While every form of business registration offers unique benefits, there are certain critical benefits registration as whole offers.
Here are 5 top reasons to register your business in California…
#1. Business Registration Protects Your Personal Assets
While we might not want to think about it, anything can go wrong in a business.
Your business might under-perform, it might fail to pick up, or unforeseen risky event might occur. Generally, the list of the bad things that might happen to your business is endless.
Yes, I know, entrepreneurs are the most optimistic people in the world. But ask any long term successful entrepreneur, they will tell you that they had to overcome humongous challenges before succeeding.
One of the reasons they were able to overcome such challenges is because they had covered their bases. They had protected themselves. Incorporating your business is one of the ways you can protect yourself. Recovering from your losses is likely to be much easier if the loss did not affect your personal asset. Both LLCs and Corporations offer you an opportunity to protect your personal asset.
With the right legal advice, you can properly structure you business to enjoy limited liability status.
#2. Business Registration Offers Tax Benefits
Minimizing your expenses will enhance the odds of your business being successful, as well as magnify your profits, in case your business is already profitable.
Reducing your tax liability, or generally cost, is one of the most effective ways of reducing your business expenses. Fortunately, incorporating your business offers you an opportunity to enjoy tax benefits that may greatly reduce your tax costs.
Tax expense deduction is definitely one of largest benefit of incorporation. Incorporation allows business to deduct fringe benefits, namely travel, medical, or any other daily business expenses.
Numerous savings can be made by deducting medical insurance that you pay for yourself or your employees. Medical premiums are 100% deductible for incorporated businesses.
In addition, incorporating your business is likely to reduce your tax expenses. As a rule of thumb, self-employed a charged are higher income tax than incorporated business. Therefore, whether you’re small business owner, home worker, or a self-employed person, you should consider incorporating your business as this would increase your disposable income.
In addition, incorporation offers social security tax deductions that are beneficial to a self-employed person.
Every income earned by a self-employed person is viewed as a personal income or salary. In addition to paying income taxes, the self-employed person also pays social security taxes. Incorporation will enable you pay social security taxes only on the portion of the income you assign yourself as salary.
Spreading or deducting your losses is another important tax benefit of incorporating. Spreading losses involves carrying forward the business losses thus reducing the tax expense for the years the losses are spread.
If for instance a business incurs a loss of $ 50,000, it can spread the loss to a period of three years. The tax expense will be lower during the period the loss is spread, even if the business makes profit.
You can also deduct losses from your income by writing off inventory and/or item sold at partial or full loss. Deducting your losses is a wonderful way of staying afloat during those days your business is struggling or not making enough profit. New business owners should particularly consider exploring this option since business usually struggle during their first few years.
In addition to deducting your losses and fringe benefits, incorporation may allow you to deduct certain expenses that you’re already incurring on a daily basis. A good example is your vehicle expenses.
Your might be already driving, to work, to meet clients, or even to drop items to your customers. While you might view these expenses as personal, they do actually qualify for a full or partial deduction since you incurred them in the normal process of running your business.
#3. Registering Your Business Adds Credibility to Your Business
Credibility can be the difference between success and failure of a business. Customers, suppliers, shareholders, and even potential partners will quickly work with a business that they consider credible. Incorporating your business is the surest way of adding credibility to your business.
It has been proven that business stakeholders prefer to work with business that have names ending with LLC or Inc. In addition, many states prohibit other business from using an already incorporated name.
Therefore incorporating your business not only adds credibility to your business, but also protects it. Imagine a situation whereby your business share a name with another unscrupulous business. The credibility of your business can be damaged beyond recovery.
Adding an LLC to your business enhances and protects the credibility of your business beyond the city or county you operate. Partnership and sole-proprietorship are in most cases registered at county or city level. Other business located in a different city or county can therefore legally use your name. Incorporation will ensure you do not share a name with another business in your state. In addition, it will allow you to expand smoothly in other cities in your state.
4. Creating Business Entity Offers Perpetual Existence
It is not possible for us to operate our business forever. At one point, we might want to transfer our business to another person. If you care about maintaining and protecting your legacy, then incorporation is the right route for you. If you care about easily transferring your business from one owner to another, then again incorporation is the right path for you.
For one reason or another, business owner might find his or herself leaving the business. You might find yourself either selling or transferring your business to a friend or family member. The process of transferring your interest may actually be complicated if your business is currently in unincorporated partnership form.
The partner who wishes to transfer his or her interest would require the consent of all partners. This can be a great inconvenience. As if the inconvenience is not enough, if the other partners are not willing to offer their consent, the partnership will have to be dissolved.
Generally, a partnership is dissolved automatically if one of the partners in unincorporated partnership decides to leave the partnership without the consent of the other partners. The situation is not any better in an unincorporated sole proprietorship. Sole proprietorship is automatically terminated if the owner dies or is no longer interested in running the business
Incorporation fortunately eliminated this transferability restriction thus enabling your business to enjoy perpetual existence. However, the law understands that transferability restriction might be appropriate to some business and/or business owners. It therefore does not make it a mandatory requirement for every incorporated business.
Business owners have option of deciding whether to adopt the transferability benefits as whole or placing restriction on it. The best approach would be to adopt it but put various restrictions on it. However, you can always talk to us so that we can discuss specific detail that best suits your business.
5. Having a Registered Business Increases Your Odds of Getting Funds
Getting funding is one of the most daunting tasks faced by entrepreneurs. Financiers will scrutinize your business to make sure everything is in odder. As pointed out earlier, incorporation increases the credibility of your business.
Financiers therefore are likely to give an incorporated business the first priority. When funding such a business, financiers will be at least sure that their money will be used for business and not personal purposes.
You can easily convince them that the separate legal entity nature acquired through incorporation will serve to protect their funds from any forms of misuse. In addition, an incorporated business is expected to have a separate bank account that investors can fund. Otherwise it is very unlikely for investors to write check in your name.
Serious investors usually prefer incorporated business. Incorporated business offers them different ways of funding a business. For instance, venture capitalist and angel investors can fund a business through purchasing the shares of the business. In fact selling your business shares is one of the best ways of acquiring funding.
It allows you to receive funding while maintaining the control of your business. Nonetheless, you need to be careful not to lose the controlling stake of your business. Selling shares of corporation or LLC is less complicated than selling shares of a partnership or a sole proprietorship.
Collateral or security is also another aspect business owners should consider while seeking funding, especially when they are seeking funding inform of cash rather than sale of shares. When relying on cash financing and you’re required to offer a collateral, the limited liability clause in corporation and LLC will protect you especially when you’re unable to meet your obligation.
Unlike in partnership or sole proprietorship, you will not signing any contract in your name. You will sign in your business name implying that you do not rely on your asset or personal line of credit. Incorporation allows your business to acquire a credit line that is separate from your personal credit line.
Your business does not need to suffer even if you have a poor personal credit history. With the right guidance, the kind of guidance we offer at Mollaei Law, you can structure your business in way that will allow it to enjoy gleaming credit profile. As result, you will be able to receive funding that will boost your business, eventually developing an income that will help clean your personal credit history.
As a business lawyer, I strongly recommend that if you are doing business in California, you should register your business in California.
The benefits of business registration far outweighs any potential cons. Limited liability aspect of registration will protect your personal asset.
Also, adding an LLC or Corporation to your business will add credibility to your organization. It will also protect your brand from being abuse by your competitors.
And finally incorporation will increase your chances of receiving financing from different sources, including banks and investors.
► If you would like to register your business, please feel free to contact me Sam Mollaei, Esq., Business Lawyer, and I will be happy to file and register your business in California.
Start Your U.S. Business Confidently
Join 3,000+ Entrepreneurs Who Have Successfully Started Their U.S. Business