Embed Size (px)
Citation preview
1
Selecting your Business Structure
Disadvantaged Business Enterprise (DBE) Supportive Services Program
The contents of this training course reflect the views of the author who is responsible for the facts and accuracy of the data presented herein. The contents do not necessarily reflect the official views or policies of the State of California or the Federal Highway Administration. This course outline does not constitute a standard, specification, or regulation.
2
Disclaimer
The information contained in this presentation has been prepared by GCAP Services as a service to the California
Department of Transportation and is not intended to constitute legal advice. GCAP has used reasonable efforts in collecting, preparing, and providing this information, but does
not guarantee the accuracy, completeness, adequacy, or currency of the information contained in this presentation. The publication and distribution of this presentation are not
intended to create, and receipt does not constitute, an attorney-client relationship.
Agenda
❖ Choice of Legal Entity❖ Key factors in selecting
your entity
❖ Types of legal entities
❖ Specific factors related to each business entity:
❖ Formation
❖ Limitations
❖ Tax and other filings
❖ Liability
2
Key factors in selecting your entity
❖Liability
❖Ownership
❖Filing requirements, fees, & formalities
❖Taxes
Types of Legal Entities
❖Sole Proprietorship
❖Corporation♦ C-Corp or S-Corp
❖Partnership♦ General or Limited
❖Limited Liability Company (LLC)
Sole Proprietorship
❖Business owned by one person
❖Unlimited liability (protect yourself with insurance)
❖Taxed as an individual at ordinary income rate
3
7
Sole Proprietorship (cont.)
❖No formal requirements to form or conduct business
❖Business license
♦ www.calgold.ca.gov
❖Sales & Use permit (Seller’s permit)
❖Fictitious Business Name statement if use different name
8
IF you are liable for: THEN use Form:
Income Tax 1040, U.S. Individual Income Tax Return
and Schedule C (Form 1040), Profit or Loss from Business
or Schedule C-EZ (Form 1040), Net Profit from Business
Self-employment tax Schedule SE (Form 1040), Self-Employment Tax
Estimated tax 1040-ES, Estimated Tax for Individuals
Social security and Medicare taxes and income tax withholding
941, Employer's Quarterly Federal Tax Return
943, Employer's Annual Federal Tax Return for Agricultural Employees
944, Employer's Annual Federal Tax Return
If you are a sole proprietor use the information in the chart below to help you
determine some of the forms that you may be required to file.
Sole Proprietorship (cont.)
9
IF you are liable for: THEN use Form:
Providing information on social security and Medicare taxes and income tax withholding
W-2, Wage and Tax Statement (to employee)
and W-3, Transmittal of Wage and Tax Statements (to the Social Security Administration)
Federal unemployment (FUTA) tax 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
Filing information returns for payments to nonemployees and transactions with other persons
See Information Returns
Excise Taxes Refer to the Excise Tax Web page
If you are a sole proprietor use the information in the chart below to help you
determine some of the forms that you may be required to file.
Sole Proprietorship (cont.)
4
10
Corporation
❖Separate legal entity
❖Formalities – state filings, bylaws, meetings, minutes
❖Ownership and Management
♦ Owned by shareholders (can be just one)
♦ Managed by directors (can be just one)
♦ Run by officers (one person can hold multiple positions)
❖Liability – limited to the corporation’s assets, not the individual owners
11
Corporation – Articles of Incorporation
❖Must file Articles of Incorporation with the Secretary of State
♦ $100 filing fee to CA Secretary of State for filing articles of incorporation
♦ First tax year -- pay tax rate on taxable income to CA Franchise Tax Board (currently 8.84%)
♦ Next tax year and thereafter -- pay tax rate on taxable income or minimum $800 tax, whichever is more, to CA Franchise Tax Board
12
Corporation – Articles of Incorporation (cont.)
• Form ARTS-GS created for ease in filing, however, any format may be
used, provided it meets statutory requirements.
• Before submitting the completed form, you should consult with an
attorney for advice about your specific business.
5
13
Corporation – Statement of Information (cont.)
Form SI-550 must be used when filing the FIRST Statement of
Information (due within 90 days after registration with the California
Secretary of State) and when ANY information has changed since the
last complete Statement of Information was filed.
14
Corporation – Statement of Information (cont.)
15
Corporation – Statement of Information (cont.)
6
16
Corporation (cont.)
❖Must qualify in other states where it does business
❖Formalities: separate bank accounts, meeting minutes, articles of incorporation, stock certificates, tax return, etc.
Corporate Taxation – C-Corporation
❖Taxed as a separate entity
❖Tax based upon corporation’s net income
❖Profits distributed to its owners -- two levels of tax:
♦ Corporation taxed on income
♦ Then shareholders and employees taxed on income and dividends
18
If you are a C corporation or an S corporation then you may be liable for...
Use Form... Separate Instructions...
Income Tax 1120, U.S. Corporation Income Tax Return (PDF)
Instructions for Form 1120 U.S. Corporation Income Tax Return(PDF)
Estimated tax 1120-W, Estimated Tax for Corporations (PDF)
Instructions for Form 1120-W(PDF)
•Employment taxes Social security and Medicare taxes and income tax withholding•Federal unemployment (FUTA) tax
941, Employer's Quarterly Federal Tax Return (PDF) or 943, Employer's Annual Federal Tax Return for Agricultural Employees (PDF) (for farm employees)
940, Employer's Annual Federal Unemployment (FUTA) Tax return(PDF)
Instructions for Form 941 (PDF) Instructions for Form 943 (PDF)
Instructions for Form 940 (PDF)
Excise Taxes Refer to the Excise Tax Web page
Corporations
Corporation (cont.)
7
19
❖No federal income tax – single tax level
❖Owners (shareholders) pay taxes individually on the profits when earned
❖Owners (shareholders) can also deduct losses on their personal income tax returns
❖Still pay state taxes -- currently 1.5% for S-corporation
Corporate Taxation – S-Corporation
20
S-Corporation (cont.)
❖ Requirements:
♦ limited to 100 shareholders
♦ corporation, partnership or trust cannot own shares
♦ shareholders cannot be nonresident aliens (for tax purposes)
❖ Additional filing requirement with the Internal Revenue Service and CA Franchise Tax Board
21
Chart 1 - S Corporation
If you are an S corporation then you may be liable for...
Use Form...Separate Instructions...
Income Tax 1120S (PDF) 1120S Sch. K-1 (PDF) Instructions for Form 1120S (PDF) Instructions for Form 1120S Sch. K-1(PDF)
Estimated tax 1120-W (PDF) (corporation only) and 8109
Instructions for Form 1120-W (PDF)
Employment taxes:•Social security and Medicare taxes and income tax withholding•Federal unemployment (FUTA) tax•Depositing employment taxes
941 (PDF) ( 943 (PDF) for farm employees)940 (PDF)8109
Instructions for Form 941 Employers QUARTERLY Federal Tax Return (PDF)Instructions for Form 943 Employers Annual Federal Tax Return for Agricultural Employees(PDF)Instructions for Form 940 Employers Annual Federal Unemployment (FUTA) Tax Return(PDF)
Excise Taxes Refer to the Excise Tax Web page
S-Corporation (cont.)
Chart 1 - S Corporation - file 1120S
8
22
Chart 2 - S Corporation Shareholders
If you are an S corporation shareholder then you may be liable for...
Use Form...
Separate Instructions...
Income Tax 1040 and Schedule E (PDF) and other forms referenced on the shareholder's Schedule K-1
Instructions for Schedule E (Form 1040)Supplemental Income and Loss(PDF)
Estimated tax 1040-ES (PDF)
Chart 2 - S Corporation Shareholders – file 1040 and Schedule E
S-Corporation (cont.)
23
Partnerships
• There are two types of partnerships• General
• Limited
• The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.
• A separate bank account should be established to run the operations.
• A partnership allows more than one owner, unlike a sole proprietorship.
• The cost to form a partnership is generally less expensive than forming a corporation.
24
Partnerships (Cont.)
• The items of income, deductions, and credits flow through from the partnership to each partner’s California Schedule K-1, Partner’s Share of Income, Deductions, Credits, and distributive shares of property, payroll, and sales.
• Each partner is responsible for paying taxes on their distributive share.
• In a general partnership, each partner is personally liable for all business debts and lawsuits.
• A partnership exists as long as the partners agree it will and as long as there are at least two partners, one of whom is a general partner.
• Partnerships do not pay income tax, however, limited partnerships are subject to the annual tax of $800.
9
25
General Partnership
❖ A business conducted by at least 2 people
❖ Each partner has unlimited liability for debts and obligations of the business
❖ Partnership does not pay federal income tax
♦ Each individual partner files returns
♦ Maximum flexibility in allocating profits and losses, e.g., cash paying partner can deduct all the losses
General Partnership (cont.)
❖No formal requirements
❖Partnership Agreement
♦ Can override partnership laws(e.g., agreement may permit business to continue even if one partner leaves through a buyout)
27
General Partnership (cont)
Chart 1 – Partnership filing Form 1065
10
28
General Partnership (cont)
Chart 2 – Partners filing Form 1040
29
General Partnership (cont.)
30
Limited Partnership
❖Similar to General Partnership
EXCEPT:
♦ General partner has unlimited liability
♦ Limited partner’s liability limited to each partner’s financial contributions
♦ Limited partner cannot participate in control of partnership
♦ Limited partner cannot deduct losses; GP can
11
Limited Partnership (cont.)
❖California Filing requirements:
♦ Must file Certificate of Partnership with the Secretary of State
♦ Initial $70 filing fee
♦ Must have a Partnership Agreement - California
Limited Partnership (CA Filing cont.)
33
Limited Liability Company (LLC)
❖Separate legal entity
❖Owners are called members (may be just one); they may have full or limited management rights
❖Fewer formalities to follow than a corporation and more flexible management structure
12
34
LLC – Key Factors
• 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.
• An LLC is typically managed by its members, unless the members agree to have a manager handle the LLC’s business affairs
35
LLC – Key Factors
• 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.
36
LLC – Key Factors
• 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.
13
37
Limited Liability Company (cont.)
Why form an LLC?
❖No limit on the number or types of members e.g., a corporation or another LLC may be a member
❖Liability limited to the LLC’s assets -- not the individual owner(s)
38
Limited Liability Company (cont.)
❖ LLC may elect not to pay federal income tax
❖ Each individual member files tax returns
❖ Maximum flexibility for allocating profits and losses
i.e., there’s no requirement that profits and losses be
divided according to the percentage of ownership. For
example, the cash paying member can deduct all the
losses.
39
Limited Liability Company (cont.)
❖Must file Articles of Organization with the Secretary of State
• $70 initial filing fee
• $800 annual tax due to CA Franchise Tax Board
• first year tax of $800 payable within first 3 months of organization
• also subject to an annual fee to CA Franchise Tax Board based on LLC’s gross income
14
40
Limited Liability Company (cont.)
41
Limited Liability Company (cont.)
❖Formalities: Must also have an Operating Agreement and maintain separate bank accounts, BUT no meetings or minutes are required
Key factors in selecting your entity
❖ Liability
❖ Taxes
❖ Filing requirements, fees, and formalities
❖ www.ss.ca.gov
(Business Portal)
15
S-Corporation or LLC?
S-Corp LLC
Liability Limited Limited
Ownership People only; limit 100
Unlimited
Management Board and officers
Flexible
State taxes 1.5% of net income
Based on gross income
44
Professional Services
❖Professional Services Companies are required to have professional licenses.❖Accounting
❖Architecture
❖Landscape Architecture
❖Land Surveying
❖Medicine
❖Optometry
❖Professional Engineering
❖Real Estate Appraising
❖Professional Nursing
45
Discussions
• Questions & Answers
• Evaluation Survey
• Upcoming Classes
• Technical Assistance
16
46
Thank you!
➢ Questions & Answers
➢ Evaluation Survey – Link will be emailed to you after this class
➢ Upcoming Classes – Register today!➢Check www.dbe-advantage.com
➢Emails will be sent to you soon
47
Business Development Program
➢ Business Plan Development
➢ One-on-One Mentoring
➢ Free Technical Assistance
➢ Certificate upon Completion of Program
➢ Teaming/Partnering
➢ Access to Recorded Webinars
➢ Access to Valuable Business
Resources
➢ Custom Level Bid Matching
For more information:
➢ Visit: www.dbe-advantage.com
➢ Email: [email protected]
