Business Organization – Frequently Asked Questions
Q: Can I convert my existing sole proprietorship or partnership into an LLC or corporation?
A: Yes. Most states have a form that allows you to convert your business to an LLC. For states that do not have a conversion form, the business must file an application to become an LLC. Some states also require a partnership to run an ad in the newspaper announcing its dissolution. You must also remember to change all of your licenses and permits over to the name of your LLC. Contact a business lawyer for more advice.
Q: What is the difference between a C Corporation and an S Corporation?
A: C Corporations are taxed under sub-chapter C of the Internal Revenue Code (I.R.C.), while an S Corporation is taxed under subchapter S of the I.R.C. In an S Corporation, the income of the corporation is not taxed at the corporate level as in a C Corporation, but rather it passes through to the shareholders. All corporations generally start out as C Corporations, but shareholders can elect to switch to S Corporation status if the corporation meets certain requirements.
Q: What is “piercing the corporate veil?”
A: In some cases, courts have allowed plaintiffs to pursue the personal assets of directors, officers or shareholders of the corporation to satisfy a judgment against the corporation or debts and other liabilities of the corporation. Generally, shareholders or owners are not personally liable for a corporation’s actions; however, if the corporate veil is pierced, they can be held personally liable. Courts may allow plaintiffs to pierce the corporate veil where the corporation is really the “alter ego” of the owners and the corporation cannot be viewed as a separate entity. This is often found to be the case where the corporation disregarded corporate formalities or the shareholders’ and corporation’s assets are intermingled.
Q: What is a “registered agent?”
A: A registered agent provides a local address for the receipt of service of papers and for contact by the Secretary of State and other agencies. A corporation and LLC need registered agents because even though they are separate legal entities, they cannot receive paperwork, so they need someone to receive documents on their behalf. The registered agent forwards service receipts, tax information and other paperwork to the business.
Q: Do I need permission to conduct business in another state when I am already incorporated in my own state?
A: Yes. A foreign corporation wishing to do business in another state must qualify to do so. It is typically a simple process. Simply contact the Secretary of State for the state in which you wish to conduct business.
Q: What is the difference between general and limited partners?
A: General partners are subject to personal liability for the debts and obligations of the partnership. In addition, general partners are typically entitled to participate fully in the management of the partnership. Limited partners cannot generally exercise much control over the business and their liability is limited to their investment in the business.
Q: What is the difference between an S Corporation and a Limited Liability Company (LLC)?
A: The S Corporation and Limited Liability Company (LLC) both provide limited liability for all shareholders and flow-through tax treatment. However, there are numerous requirements that corporations must meet to qualify for S Corporation status that do not apply to LLCs. To qualify as an S Corporation, the corporation must be a domestic corporation with only one class of stock and with no more than 75 shareholders.
Q: What is a non-profit corporation?
A: A nonprofit corporation is a corporation that is carried out for a charitable, educational, religious, literary or scientific purpose. A non-profit corporation does not pay either state or federal taxes because the government deems the corporation’s actions to be for the betterment of society.
Q: What is the difference between nonprofit and tax-exempt?
A: The term “nonprofit’ refers to the status of your organization or entity under California law. The term “tax-exempt” specifically applies to tax exemption under US and California tax laws.