The Basics of Business Formation
There are four basic choices for forming a business: sole proprietorship, partnership, corporation and limited liability company. Each one has its advantages and disadvantages, so it’s the first important decision a business owner must make. Consideration should be given to personnel needs and the needs of a particular type of business.
Sole ProprietorshipA sole proprietorship permits 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: Don Juan de Taco Shop), the owner must file a Fictitious Business Name Statement with the county where the principal place of business is located.
PartnershipThere are multiple types of partnerships. In a Limited Partnership, 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 Limited Partnership have unlimited personal liability for the partnership's debts and obligation.
General Partnerships 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 Partnerships ("LLP") engage in the practices of accountancy, law, architecture, engineering or land surveying, or provide 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.
CorporationA Corporation 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. The sale of stocks or bonds can generate additional capital and the longevity of the corporation can continue past the death of the owners. Legal Counsel should be consulted regarding the variety of options available.
Limited Liability Company (LLC)A Limited Liability Company 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. The LLC does not file the operating agreement with the Secretary of State but maintains it at the office where the LLC's records are kept.