Corporations and LLCs Do Not Automatically Provide Benefits

  • You may have formed an LLC or a corporation with the understanding that your business structure would save you money in taxes and protect you from lawsuits and creditors. But for most small and micro businesses in California that is a myth. Only about two percent are in compliance and most are violating some regulation daily.

    Warning: Forming a corporation or LLC will not automatically provide you with any tax benefits or protect your assets. Having approved Articles from the Secretary of State is meaningless, if the IRS or a litigating attorney comes after you and it’s discovered that you have not followed regulations mandated by federal or state law.

    The IRS and the courts have consistently ruled that if you are not acting like a corporation or LLC, then you are NOT one.

    In order to get the intended tax benefits and asset protection, owners and managers must follow certain required formalities. Some formalities should be done soon after receiving the approved Articles, some are annual mandates and others are required when certain actions are taken during the day-to-day operations of the company.

    Not following federal and state mandates can be costly:

    • It could cost you thousands of dollars in self-employment tax if the IRS re-characterized your S corporation to a sole proprietor or partnership.
    • Tax-favored fringe benefits could be lost, costing you even more money.
    • Your corporation or LLC could lose its legal standing and be barred from defending itself or bringing suit for damages against another.
    • Contracts made by your corporation or LLC could be deemed invalid allowing others to get out of their obligation to your company.
    • You could lose the asset protection afforded a corporation or LLC, thereby subjecting your home and personal assets to liens and seizures.
    • You could be subject to disciplinary actions and penalties from regulators for not following the Rules or for not filing required documents timely. And more…

    Our LLC and corporate compliance services can help assure that your company is property formed and maintained to provide tax benefits, tax-free fringe benefits for you and your family, reduce your chance of an IRS audit and protect the asset protection features provided under LLC and corporate law. (See our article: “LLC and Corporation Compliance Program” for more info).

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