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Things to consider when choosing a business formation

Business formation in California can be a complicated matter. Due to overlapping liability laws, tax laws and other considerations, choosing the right legal option for business formation is essential for any start-up company.

In the construction world, protecting an individual's personal assets from liability is often crucial, so most new construction companies are eager to take advantage of the protection that incorporating or forming a limited liability company, or LLC, can offer.

An LLC is a popular choice for construction business formation, especially for small business owners who desire simplicity and may not be interested in the additional features and complications of an incorporated entity under California and federal laws. In the case of an LLC, the owner is responsible for payment of personal income taxes, as opposed to the LLC as an entity being liable for taxes. An LLC is a simpler way to get personal liability protection without having to deal with the complexities of corporation formation and administration.

However, larger businesses and those businesses that have additional needs should consider incorporating. This is especially true if the objective of the business is to have shareholders, share assets or property amongst shareholders or to offer employee benefits like retirement plans or health insurance. There are many options under the umbrella of incorporation, but the S-corp is often preferred among entities in the construction world. An S-corp allows pass-through taxation like an LLC, as well as other benefits that are unique to a corporation, so in many ways an S-corp is the best of both worlds between a corporation and an LLC.

Starting a business can be an exciting and challenging time and it's important to get started on the right track. Of course, every new and expanding business has different needs and objectives, so those business owners who want answers should always consult with an experienced California business formation attorney about the options that are available to them, as well as the short-term and long-term consequences of each option.

Source: FindLaw, "Corporation versus LLC," accessed Nov. 22, 2014

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