1. Choosing the Right Entity
    California taxes entities differently depending on the structure. Did you know a C Corporation is not subject to the limitations of IRC 280E for California Income taxes? Choosing the right entity means choosing the right Asset Protection Plan. Let Us Show You How.
  2. Asset Protection Strategies
    The goals of asset protection planning are to provide an incentive for settling a claim, improve the client’s bargaining position, offer options when a claim is asserted, and, ultimately,deter litigation. It must be implemented before there is even the hint of a claim.
  3. Understanding the Tax Consequences
    The analysis of taxation and what entity to choose will be significantly modified if the 2017 Tax Bill passes. A C Corporation may come back as the preferred entity structure. Let us tell you why?
  4. Protection from IRS Levies
    We believe a C Corporation provides the best protection from a IRS Levies against your personal assets. There is no reason to lose your farm, your house, your car or your personal belongings. We can provide Asset Protection advice.
  5. Required Fiduciary Duties to Investors
    In order to maintain the Corporate Shield you have duties and responsibilities you and your company will have to comply with. We can assist with ensuring protection from Piercing the Corporate Veil claims and litigation. Compliance requires diligence.
  6. Paperwork Filings
    Let us handle the paperwork and allow you to sleep at night. We have years of experience forming different types of entities.
  7. Ability to Raise Capital
    How you operate and the structure you choose may have an effect upon your personal protection and the ability to raise capital.
  8. Stock Options, Grants and Phantom Ownership
    Want to give your employees equity or a share of the profits. We can assist with the structure you want and provide a method to result in the least financial impact for both the Company and your employees.
​TYPES OF ENTITIES: 

  • C Corporation
  • S Corporation
  • ​Limited Liability Company
  • Joint Venture
  • ​General Partnership
  • Limited Partnership
  • ​Non Profit 501(c)(3)
  • Sole Proprietor (Schedule C)
  • By-Laws & LLC Operating Agreements
  • Buy-Sell Agreements
  • Shareholder & Membership Subscription Agreements
​​
​WHAT DO I DO? 

  • GIVE US A CALL (916) 292-9412
  • California currently provides C Corporations full deduction of expenses for cannabis companies
  • The tax legislation being debated by Congress will affect decisions
  • Personal protection from tax levies
  • Ability to attract capital
  • Protection of assets from forfeiture
  • Voting rights, control and fiduciary duties depend on entity structure
WHAT ENTITY IS RIGHT FOR YOU: CALL 702-250-5608
WE EXPLAIN THE DIFFERENCES:
​Partnership: A partnership is a legal entity for a business entered into by two or more persons. There are two types of partnerships: general or limited. In a general partnership, all the partners are personally liable for partnership debts. In a limited partnership, however, at least one partner must be designated as the general partner, and that general partner has unlimited personal liability for partnership debts. The limited partners, on the other hand, are liable only to the extent of their investment in the company. However, a limited partner might lose his or her "limited" status and thus be personally liable for partnership debts if he or she is viewed as playing a role in management, i.e., acting as something other than a purely passive investor.

Limited Liability Company: LLCs have become increasingly common, particularly in the startup realm. In general, it is far easier and less expensive to set up an LLC than it is to set up a corporation. An LLC only requires an operating agreement outlining the expected duties of managers and the general governance of the company, thereby avoiding some of the costlier corporate formalities mentioned above. LLC has the potential to provide the same liability protection as that afforded by corporations (and better than that of partnerships).  An LLC offers more flexibility than either a partnership or a corporation on the tax front. Specifically, by way of a simple election, an LLC can be treated for tax purposes as a partnership, a C corporation, or an S corporation. An LLC with more than one owner is treated by default classification as a partnership for tax purposes. However, at any time, the LLC can file a Form 8832, Entity Classification Election , with the IRS and elect to be treated as a corporation. If the LLC prefers to be treated as an S corporation (and it otherwise qualifies as an S corporation, e.g., in number and type of shareholders and having only one class of stock), it can file a Form 2553, Election by a Small Business Corporation. From a tax perspective, this flexibility may be attractive for a startup business.
​initial DecisionA significant initial decision in setting up a business is the choice of entity in which to conduct the business. There are tax and non-tax considerations.  A business must take many factors into account when deciding which form of entity is appropriate. The ease and cost of entity formation may cause some business structures to stand out to entrepreneurs, particularly when they are starting out with very little capital. However, the flexibility of the structure is of significant importance, as startups are dynamic and have different needs at different stages of growth. Accounting for these needs from the start may reduce the likelihood of incurring avoidable costs in changing the type of business entity. The landscape is rapidly changing with the impending significant tax law changes being considered by Congress and President Trump. With the C Corporation Tax Rate set to decrease, and the current tax advantages afforded C Corporations under California Law  

Corporation: Corporations are legal entities independent from their owners and provide some protection from personal liability. Thus, a shareholder's risk of loss is limited to his or her direct investment in the corporation. However, to sustain that liability shield, certain legal formalities must be observed, e.g., a corporate charter, bylaws, and a board of directors, as well as compliance with regulatory reporting requirements. Compliance with these formalities often comes with significant legal costs, which may be daunting for a startup company. C corporations allow for an unlimited number of shareholders, with no restrictions on the type of ownership, whereas S corporations have a limit of 100 shareholders, all of which must be either U.S. citizens or permanent residents, certain trusts, bankruptcy estates, other estates, and certain tax-exempt organizations, not corporations (including LLCs) or partnerships. Although a C corporation does not restrict stock issuance, an S corporation can have only one class of stock.

Tax Elections in General
Taxation as a partnership: For LLCs treated as partnerships for tax purposes, earnings and losses pass through the LLC to its owners, and each owner's respective share (generally determined by the LLC's operating agreement) is included on the owner's return. Thus, it is a single tax regime, as there is no taxation at the entity level. Taxation as a partnership can be a particularly good option if the business will be holding property expected to increase in value, as gain will be taxed at only one level. However, taxation as a partnership can come with a few downsides. If significant services the members provide to the LLC give rise to the majority of the LLC's income, the members typically must pay self-employment tax (consisting of Medicare and Social Security taxes) on their share (see Sec. 1402(a)(13); Renkemeyer , Campbell and Weaver, LLP , 136 T.C. 137 (2011); and Chief Counsel Advice 201436049). Another downside is that having a large number of investors in the LLC can make compliance time-consuming and costly, as Forms K-1 allocating profit and loss must be issued to each member.

Taxation as an S corporation:
 S corporations are more common than C corporations, and while they are also corporations, they maintain a special tax status. S corporations are passthrough entities, meaning the profits and losses are not taxed at the corporate level, but are instead divided pro rata among the owners and included on the owners' personal tax returns. The self-employment tax in an S corporation setting is limited to the compensation received for services, rather than applied to all income received from the business, as long as shareholder-employees pay themselves reasonable compensation.

Taxation as a C corporation: The C corporation rules envision a double-tax regime—earnings are taxed at the corporate level and then again at the shareholder level upon the distribution of a dividend. Though avoiding the double-tax structure of a C corporation is usually desirable, the members of an LLC may find it beneficial to be taxed at these two levels. Taxation as a C corporation allows for the splitting of money between the members of the LLC and the LLC itself, which may result in overall tax savings, depending on the rate of taxation on retained earnings for the business, and on income of the individual. Although C corporation treatment can be advantageous, it is often not immediately helpful for startups; it takes time for a business to reach profitability (and consequently, build up retained earnings). Rather, it is something an entrepreneur may want to keep in mind for the future. In the case where an LLC initially classified as a partnership elects to be treated as a corporation, it is treated as contributing its assets to the corporation in exchange for stock and subsequently liquidating by distributing the stock to its members (Regs. Sec. 301.7701-3(g)(1)(i )) . Such a transaction may be structured to be tax-free under Sec. 351, provided that the transaction was undertaken as part of a plan to transfer partnership operations to a corporation, was organized for a valid business purpose, and was not a device to avoid recognition of gain (see Sec. 351; Rev. Rul. 84-111; and Rev. Rul. 70-239).
“A C Corporation currently provides the greatest range of expense deduction for Caifornia taxes for a cannabis company.
LET US TELL YOU WHY”
C Dean Homayouni, Esq., CPA
Founding Partner
 
Incentives for Employees and Attracting Investors
Compensatory Options

Some startups may wish to issue stock options as compensation as an incentive for retaining key employees. Stock option plans issuing incentive stock options (ISOs) receive favorable tax treatment and are an attractive feature for employees. Employee stock ownership plans (ESOPs) also provide certain tax benefits. A startup wishing to issue these types of instruments might be better advised to avoid the LLC form in favor of the corporate form.

Attracting Investors

An LLC's ability to easily convert to another entity may work well for a startup with plans of someday undertaking an initial public offering. However, encouraging investment with an LLC as the chosen entity may be a problem for startups requiring additional funding. Tax-exempt organizations, such as qualified pension plans and individual retirement accounts, provide a significant capital pool for private-equity funds and venture capitalists, which in turn operate as a major source of funding for startups seeking capital. Private-equity funds consisting of these organizations, which are generally exempt from income tax on passive investment, are subject under Sec. 511 to tax on unrelated business taxable income (UBTI) when investing in an LLC.

While UBTI may be a deterrent for a venture capital fund, rather than a deal breaker, the inability to obtain preferred stock from an LLC has historically functioned as the latter. LLCs are not subject to the one-class-of-stock restriction of S corporations, but LLCs sell membership interests in the business, rather than shares, and typically anyone purchasing a stake has as much decision-making power as the other members of the LLC. Traditionally, venture capitalists and angels desired preferred stock and thus only invested in C corporations. ​