When forming a legal entity, it’s best that it be created separate from the holdings of its owners to ensure limited liability. Historically, the choice has been for owners to form a corporation. Today, however, there may be better choices: C-corporations, S-corporations, Limited Partnerships and Limited Liability Companies (LLC’s).
Generally, California and Federal law provide business owners with multiple organization structure possibilities, generally including:
- Sole proprietorship
- Limited Liability Company
- Limited Partnership
- Limited Liability Partnership
Choosing the proper entity when establishing a business is a critical decision, and a tax attorney or lawyercan help guide you through the process. Depending on each interest party’s concerns, such as asset protection, minimization of personal income taxes, or planning for the overall success of the business venture, great considerations must be given to the selection of the business entity. In some cases, a multi-entity structure must be utilized to address the concerns of every interested person. IRS tax attorneys help business owners select the best entity identity for tax purposes.
A sole proprietorship allows an individual to own and operate a business by him/herself. 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, a Fictitious Business Name Statement must be filed with the county where the principal place of business is located. Generally, there are no other formal requirements to own and operate a sole proprietorship. However, depending on the business venture, a particular license or certification may be required.
A corporation is an entity that exists separately from its owners (shareholders). A corporation may be utilized to provide asset protection for its stakeholders, as well as protection for managers, officers and directors. There are numerous types of corporate entities, including:
- Close Corporation: These corporations must meet the minimum statutory requirements and generally consist of family members as shareholders and operators.
- Subchapter S Corporation: A corporation electing Subchapter S regulation provide limited liability to its shareholders as well as pass through taxation to shareholders (meaning the corporation is not taxed but the corporations shareholders are taxed individually.) In California, there is an annual fee to operate a corporation with a Subchapter S election and shareholders must consider and anticipate the business profitability before electing to be treated under Subchapter S.
- C Corporation: Any corporation that does not elect to be treated under Subchapter S of the Internal Revenue Code is a C Corporation. Our attorneys will explain the benefits and drawbacks of each type of corporation.
Our law firm will also research and analyze the appropriate state of incorporation for your business. Generally, businesses operating in California will choose to become incorporated in California. However, there may be advantages to incorporating in Delaware or Nevada, and registering the business in California as a foreign corporation.
Limited Liability Company
A domestic limited liability company generally offers liability protection similar to that of a corporation but is taxed differently. Domestic limited liability companies may be managed and operated 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 limited liability company and the conduct of its business is required. Our law firm will assist you with drafting an appropriate and clear operating agreement, which has similar effect of corporate bylaws. There is a minimum annual tax in California to operate a Limited Liability Company.
General, Limited, and Limited Liability Partnerships
A general partnership is required to have two individuals engaged in a business for profit. Generally, there are no formal requirements to establish and operate a general partnership; however, it would be wise to consult a Wilkinson & Finkbeiner attorney before doing so. General partners are jointly and severally liable for all business obligations as well as the conduct of the other partners, and may be required to meet certain local government requirements. An expertly drafted partnership agreement should be the minimum condition for every partner.
Formal requirements are set forth to establish a limited partnership, which must consist of at least one general partner and one limited partner. Limited partners maintain limited liability for business obligations and the conduct of general partners. Many families elect to form a family limited partnership, which provides asset protection and management, easy succession of ownership interests, estate tax advantages, and other benefits.
A limited liability partnership (LLP) is a partnership that engages in the practice of public accountancy, the practice of law or the practice of architecture, or services related to accountancy or law. A limited liability partnership is required to maintain certain levels of insurance as required by law, and must register with the California Secretary of State.
Depending on the nature of the business and the number of people who wish to be involved, each entity offers specific advantages and disadvantages. Some may value alienability of assets more highly than others, whereas someone else’s main concern is to limit tax liability. While this chart may provide useful information in helping you determine which entity may be best for you, it should not be viewed as legal advice. Based on the current tax and business laws, you should seek the advice of a tax attorney to help you decide which entity will help you achieve your individual goals.