Full question:
I am a State Licensed Professional Architect. I want to start a company/corporation to protect or personal assets. It will be just me at first but I want to have the ability to grow as needed. At the same time I want this to be as simple as possible. From what I have read the S Corp or LLC seems to be the way to go. Which is the better option given my situation? If I go with the Corporation does it have to be a 'Professional Corporation?' If so, why? If not, what are the ramifications of not doing so?
- Category: Corporations
- Date:
- State: California
Answer:
As a State Licensed Professional Architect in California, you have two main options for forming a business: an S Corporation or a Professional Corporation. Both options can help protect your personal assets from lawsuits.
It's important to note that California does not allow limited liability companies (LLCs) to provide professional services. Instead, you can form a Professional Corporation. This is necessary because California law defines 'professional services' as those requiring a license, certification, or registration (Cal. Corp. Code §§ 13401(a), 13401.3).
Tax-wise, S Corporations in California face a 1.5% net income tax, while LLCs are subject to an entity-level fee based on gross receipts. If your business operates at a loss, a corporation may be more advantageous. Conversely, if it operates at a profit, an LLC could result in lower overall taxes.
For example, with $500,000 in gross sales and a 15% profit margin, an S Corporation would pay about $1,125 in taxes, while an LLC would pay approximately $900 plus $800 in franchise tax, making the LLC more expensive in this scenario.
LLCs also have simpler record-keeping requirements and fewer formalities compared to S Corporations. You don't need payroll for an LLC and can take draws as needed, which can help with cash flow. However, if your revenues are solid, the differences may not be as significant.
It's advisable to consult with a local tax professional for tailored advice regarding your specific situation.
This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.