California Startups: When Should You Choose an S Corporation Instead of an LLC?

In this article, you can discover…

• The key differences between an LLC and an S Corporation in California.
• Why so many California businesses begin as LLCs.
• Common entity-selection mistakes entrepreneurs often make, and how an attorney can help.

What Are The Key Differences Between An LLC And An S Corporation Under California Law?

An LLC is much simpler to set up as far as paperwork is concerned, and there are far fewer moving parts when compared to an S Corporation.

The hierarchy of an LLC is often much simpler. They are typically managed by a single member, multi-members or by a managing member.

In contrast, an S Corporation will have officers, such as a president, CEO, a Secretary, and a Treasurer, but will also have a board of directors who will vote on certain matters that pertain to the company. An S Corporation will also have shareholders who can vote on certain Company matters.

If your imagined business is smaller, such as a barber shop, a cafe, or even a small tech company, an LLC may be sufficient, at least on a temporary basis.

Why Do Many California Startups Begin As LLCs Rather Than S Corporations?

Many founders of startups do not want to spend a lot of money upfront to get their business running, and S Corporations can be expensive to establish. Instead, many entrepreneurs will start an LLC on their own, use a third-party site to file their LLC for a reasonable amount of money, or use their own CPA or accountant to create an LLC. However, we recommend you use a qualified licensed attorney as saving money can often cost you a lot more later down the road.

It really comes down to a desire to save money, especially if a founder is not sure if their business will grow. There’s a lot of uncertainty involved, and you may wish to test the waters of revenue and success with an LLC before you convert your business into an S Corporation, or to a Delaware Corporation if you’re a tech company.

Attorney Ranvir Sandhu is a respected, seasoned business law attorney serving California. Since 2010, he’s helped entrepreneurs just like you understand which entity type best meets their needs, and ensure that all needed documentation and agreements are drawn up with care, filed properly, and are binding.

Have questions, or in need of legal guidance as you start your LLC or S Corporation? Reach out to Insight Legal for an initial consultation today.

What Common Entity-Selection Mistakes Do Startup Founders Make?

In many cases, founders will make the mistake of not setting up the company correctly and not having the correct paperwork filed. They may simply use an online service that provides the minimal paperwork needed, but other necessary documents, such as agreements with shareholders, may not be prepared and signed.

In other cases, agreements are verbal and are not documented properly, requiring lawyers’ help on both sides to resolve issues.

For example, an S Corporation will require several different types of documentation, such as articles of organization, bylaws, a common stock purchase agreement, securities filings and etc..

There is a lot of paperwork involved, and many founders of corporations simply don’t get them drawn up or filed at all. They believe that just forming the company is enough, and that if legal issues come up later, they’ll simply hire an attorney at that point.

But the cost of getting attorneys involved to resolve the matter can cost far more than simply allowing an attorney to review your founding and documentation process to begin with.

Why Should California Entrepreneurs Consult A Business Attorney Before Choosing A Business Structure?

Hiring a business attorney who has experience in corporate law can greatly improve efficiency as you establish your business, and your attorney will know what type of entity would best suit your needs. A seasoned lawyer will ask you questions to determine your goals, both temporary and long-term. From there, they will properly assess the type of entity and agreements that you will need.

This helps ensure you get the proper scope and have everything handled correctly. If they are truly good attorneys, they will also have the latest and most recently updated forms and document types, too.

Still Have Questions? Ready To Get Started?

For more information on California S Corporations vs LLCs, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (510) 214-4100 today.