Entity Formation & Structuring
Choosing and setting up the right business structure — LLC, S-Corp, C-Corp, partnership — with California-specific tax implications and long-term planning.
Tools & Resources
LLC vs S-Corp vs C-Corp Tax Comparison
All tax layers modeled including the CA LLC fee
GuideBest Business Structure for Tech Companies
VC, bootstrapped, and hybrid scenarios covered
GuideBest Business Structure for Entertainment Companies
Loan-outs, production entities, and IP holding structures
GuideView All Entity Formation Guides
Guides for manufacturing, distribution, retail, real estate, personal services, and marketing
Key Terms to Understand
Transmutation
A change in the character of property from separate to community (or vice versa). In California, transmutations of real or personal property must be in writing and signed by the spouse whose interest is adversely affected. Properly executed transmutation agreements can protect business assets in divorce.
Buy-Sell Agreement
A contract between business co-owners that governs what happens when an owner wants to leave, dies, becomes disabled, or gets divorced. Specifies how ownership interests are valued, who can buy them, and the terms of purchase. The single most important document for any multi-owner business, and the one most often missing or outdated.
Right of First Refusal (ROFR)
A contractual right giving existing owners the opportunity to match any outside offer before an ownership interest can be sold to a third party. Standard in most operating agreements and partnership agreements. Without it, a partner could sell their share to anyone.
S-Corp Election
An IRS tax election (Form 2553) allowing a corporation or LLC to pass income through to owners' personal returns, avoiding corporate-level tax. The key benefit: owners who are also employees can split income between salary (subject to FICA) and distributions (not subject to FICA), saving 15.3% on the distribution portion. The #1 tax-saving structure for profitable small businesses.
Reasonable Compensation
The salary an S-Corp owner-employee must pay themselves before taking tax-advantaged distributions. Must be comparable to what the role would pay on the open market. Set it too low and the IRS reclassifies distributions as salary (plus penalties). Set it too high and you lose the tax benefit. Getting this number right is the core of S-Corp tax planning.
Qualified Business Income (QBI) Deduction (Section 199A)
A 20% deduction on qualified business income from pass-through entities (S-Corps, LLCs, partnerships, sole props). Phases out for specified service trades at $191K single / $383K joint (2024). Complex rules, but for eligible businesses, it effectively reduces the top federal rate on business income from 37% to 29.6%.
Operating Agreement
The governing document for an LLC that defines ownership structure, member rights, management authority, profit distribution, and what happens when a member leaves, dies, or disputes arise. California doesn't require one, but operating without one means default state rules apply — and those defaults rarely match what the members actually want.
Limited Liability Company (LLC)
A flexible business entity that provides liability protection without the formality of a corporation. Can be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp. Default taxation is pass-through. In California, LLCs pay an $800 minimum franchise tax plus a gross receipts fee ($900–$11,790) that catches many owners off guard.
C-Corporation
A business entity taxed separately from its owners at the corporate rate (21% federal). Profits are taxed at the corporate level, then again when distributed as dividends (double taxation). Despite this, C-Corps are standard for venture-backed companies (investors require it) and businesses planning IPO or seeking QSBS exclusion.
Qualified Small Business Stock (QSBS) Exclusion
Section 1202 allows exclusion of up to $10M (or 10x basis) in capital gains on the sale of qualified small business stock held for 5+ years. The business must be a C-Corp with under $50M in gross assets. One of the most powerful tax benefits available to founders and early employees of tech companies.
California Franchise Tax
California's annual tax on the privilege of doing business in the state. Every entity (LLC, S-Corp, C-Corp) pays a minimum of $800 per year — regardless of profit or activity — for as long as it exists. S-Corps owe an additional 1.5% of net income (minimum $800). C-Corps owe 8.84% of net income. LLCs also owe a separate gross receipts fee ($900–$11,790) on top of the $800 minimum. The franchise tax is the single most expensive 'cost of existing' for California entities.
FICA (Self-Employment Tax)
Federal Insurance Contributions Act tax — Social Security (6.2%) plus Medicare (1.45%) — paid on wages by both employee and employer (total 15.3%). Self-employed individuals (sole props, single-member LLCs, partnerships) pay both halves themselves as self-employment tax. Social Security portion caps at $168,600 (2024); Medicare has no cap but adds 0.9% on income above $200K single / $250K joint. Avoiding FICA on the distribution portion of income is the #1 reason high-earning service businesses elect S-Corp status.
Prenuptial Agreement
A written agreement signed before marriage that defines property rights and financial responsibilities during and after marriage. Under California Family Code §1610-1617, prenups can designate a business as separate property, waive community property claims, and limit spousal support. Requirements for enforceability: independent counsel for both parties, full financial disclosure, signed at least 7 days before the wedding, and not unconscionable. For business owners, a properly executed prenup is the single most effective protection against losing the business in divorce.
Dealing with entity formation? Let's talk.
Dennis Duitch has guided hundreds of business owners through entity formation situations across technology, entertainment, manufacturing, and professional services.
MBA, Northwestern University · CPA · Certified Business Appraiser · Mediator · 30+ years of practice