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Choosing an Entity for Your Small Business


If you are planning on starting a business, there are many options as to what entity you should organize your business as. California recognizes many different kinds of business entities, but the most popular are sole proprietorships, general partnerships, corporations, limited liability companies, and limited liability partnerships.

Sole Proprietorship

Under a sole proprietorship, there is one principal owner of the enterprise who enjoys sole right to the profits of their undertaking. Forming a sole proprietorship is easy and doesn’t require much more than choosing a name for your business, acquiring applicable business licenses, and applying for and receiving a tax ID number.

Owners of a sole proprietorship will be taxed on the income they receive through the business. Furthermore, owners of sole proprietorships are personally responsible for the obligations and liabilities that the business incurs.

General Partnership

A partnership is an association of two or more persons to carry on as co-owners a business for profit, regardless of whether they intend to form a partnership. In contrast to a sole proprietorship, general partnerships have more than one owner. This configuration benefits the business enterprise by promoting a division of labor that could plays to the strengths and weaknesses of the partners.

Similar to a sole proprietorship, all partners are personally liable to the business’ creditors for the liabilities and obligations it incurs. Forming a general partnership requires the partners to have a partnership agreement that is then registered with the California secretary of state.

A Limited Partnership

A limited partnership is a partnership formed by two or more persons with at least one general partner and one limited partner. A “limited partner” is one whose personal exposure to liability through the business is limited. As a result, creditors of the business may not pursue the limited partner’s personal assets to satisfy an obligation that the business incurs. On those assets that the limited partner contributes to the business may be taken by the business’ creditors.

C Corporations.

All corporations are considered to be a separate and distinct legal entity that is recognized apart from its owners (shareholders), officers and directors. Unlike sole proprietorships and general partnerships, the shareholders and corporate officers are not personally responsible for the liabilities of the corporation.

Additionally, forming a corporation is a more involved process than forming a sole proprietorship or partnership. To form a corporation, the rules that govern the nature and operation of the enterprise must be contained in a document known as the Articles of Incorporation and By-Laws. This document must also be registered with the California Secretary of State’s offices.

A corporation must have an established board of directors who are responsible for making general business and administrative decisions on behalf of the corporation. The board can also administer the corporation’s officers, including the chief executive.

Furthermore, a corporation must identify an agent for service of process. Thus, whenever the corporation must be served by a third-party for legal action, they can identify that person and find them so service of process can be completed.

C Corporations are also considered to be distinct entities for tax purposes. As a result, C Corporations are subject to what is informally known as “double taxation.” The term double taxation refers to how revenue that the business earns is taxed as income for the business, and any distributions of the business made to its shareholders are taxed as the income of the individual shareholder.

S Corporations

An S corporation is also a distinct legal entity that is separately recognized from its shareholders and officers. However, S Corporations are not taxed on the revenue they produce. Any profits or losses pass through the S corporation to the individual shareholders.

The designation of a corporation as a C corporation or S corporation occurs during the formation phase. Both C and S corporations are subject to many formalities. This includes keeping records of meetings between the board of directors and staying compliant with state and federal requirements for the disclosure of financial statements.

Limited Liability Companies

Limited liability companies (LLCs) are a relatively recent invention. Unlike a corporation, LLCs are not subject to many formalities. To legally form an LLC, the members must enter into a written Articles of Organization which must be filed with the California Secretary of State. This document is similar to corporate Articles of Incorporation. An LLC must also name an agent for service of process.

However, unlike a corporation, an LLC does not need to establish a board of directors. There are also no formal requirements regarding holding meetings and submitting financial disclosures. Also, LLCs are not taxed separately from the members who own and operate the entity.

Limited Liability Partnerships

A limited liability partnership is similar to an LLC, but is an exclusive option for businesses made up of certain professions, such as architects, accounts, and attorneys. Unless the partnership is made up of those professions that are identified under state law, an LLP is not an option available to you.

Sound Legal Representation for Businesses in California

At Allen, Semelsberger & Kaelin LLP we have the training and experience to help you ensure your California business operations comply with the law. We also provide effective legal representation to prevent other companies from engaging in unfair business practices, like trademark infringement.

For more information about how we can assist you and your business, call Allen, Semelsberger & Kaelin, LLP at 888.998.2031or contact us online today.