Business Entity Formation

Once you decide to establish a business, a primary consideration is the type of business entity to form. Tax and liability issues, director and ownership concerns, as well as state and federal obligations pertaining to the type of entity should be considered when making your determination. Personal and personnel needs and the needs of your particular type of business should also be considered.

The following is a brief overview of various business structures. The information is intended to provide a basic understanding of the different business structures and is not intended to provide legal advice.

Corporation
Limited Liability Company
Limited Partnership
General Partnership
Limited Liability Partnership
Sole Proprietorship

Corporation

A California corporation generally is a legal entity which exists separately from its owners. While normally limiting the owners from personal liability, taxes are levied on the corporation as well as on the shareholders. Corporations must have articles of incorporation and bylaws. Proper management of a corporation requires use of board resolutions, annual shareholder meetings, regular board meetings, etc. The sale of stocks or bonds can generate additional capital and the longevity of the corporation can continue past the death of the owners.

There are many different categories of corporations including for profit corporations, professional corporations; nonprofit corporations; mutual-benefit corporations. Each of the foregoing involves certain different set of rules that should be addressed when consideration the proper formation of your business entity.

Limited Liability Company (LLC)

A California LLC generally offers liability protection similar to that of a corporation but is taxed differently. Domestic LLCs may be managed by one or more managers or one or more members. In addition to filing the applicable documents with the Secretary of State, an operating agreement among the members as to the affairs of the LLC and the conduct of its business is required.

Limited Partnership (LP)

A California LP may provide limited liability for some partners. There must be at least one general partner that acts as the controlling partner and one limited partner whose liability is normally limited to the amount of control or participation of the limited partner. General partners of an LP have unlimited personal liability for the LP’s debts and obligation.

General Partnership (GP)

A California GP must have two or more persons engaged in a business for profit. Except as otherwise provided by law, all partners are liable jointly and severally for all obligations of the partnership unless agreed by the claimant. Profits are taxed as personal income for the partners.

Limited Liability Partnership (LLP)

An LLP is a partnership that engages in the practice of public accountancy, the practice of law, the practice of architecture, the practice of engineering or the practice of land surveying, or provides services or facilities to a California registered LLP that practices public accountancy or law, or to a foreign LLP. An LLP is required to maintain certain levels of insurance as required by law.

Sole Proprietorship

A sole proprietorship is set up to allow an individual to own and operate a business. A sole proprietor has total control, receives all profits from and is responsible for taxes and liabilities of the business. If a sole proprietorship is formed with a name other than the individual’s name (example: John Smiths Fishing Shop), a Fictitious Business Name Statement must be filed with the county where the principal place of business is located.