Which Business Entity is Right For You?
When forming a new business in California, you need to first choose one among the different forms of California business entities available for your particular business. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. In many situations, a sole proprietorship may be sufficient.
If you do have assets, are concerned about liability, or your new business will generate at least $50,000 in annual income, then you might want to consider either a corporation or a limited liability company. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.
Legal and tax considerations enter into selecting a business structure, and your form of business will determine which income tax return form you will have to file. If you are not sure which business entity is the best for your situation, you would be advised to obtain some general guidance from CPA or attorney.
California Business Entities
The following information will help you to understand the differences between the various forms of business entities that you may want to consider. Click on the type of company for more information.
|Type of Company||Liability||Operations||Management||Raising Capital|
|Limited Liability Partnership||No||Medium||Members||Possible|
|Limited Liability Company||No||Medium||Members||Possible|
|Non Profit Corporations||No||Difficult||Board||Difficult|
- Sole Proprietorship: This is a business run by one person for his or her own benefit. It is the simplest form of business organization. Proprietorships have no existence apart from the owners. The liabilities associated with the business are the personal liabilities of the owner, and the business terminates upon the proprietor’s death. The proprietor undertakes the risks of the business to the extent of his/her assets, whether used in the business or personally owned.
- General Partnership: A general partnership is an agreement, expressed or implied, between two or more persons who join together to carry on a business venture for profit. Each partner contributes money, property, labor, or skill; each shares in the profits and losses of the business; and each has unlimited personal liability for the debts of the business.
- Joint Venture: A Joint Venture is a business arrangement in which two or more parties agree to pool their resources for accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants’ other business interests.
- Limited Partnership: Limited partnerships limit the personal liability of each partner for the debts of the business according to the amount they have invested. Partners must file a certificate of limited partnership with state authorities.
- Limited Liability Partnership: In limited partnerships, at least one of the owners is considered a “general” partner who makes business decisions and is personally liable for business debts. Limited Partnerships also have at least one “limited” partner who invests money in the business but has minimal control over daily business decisions and operations. The advantage for these limited partners is that they are not personally liable for business debts. The limited liability partnership (LLP) is a similar business structure but it has no general partners. All of the owners of an LLP have limited personal liability for business debts.
- Limited Liability Company: An LLC is a hybrid between a partnership and a corporation. Members of an LLC have operational flexibility and income benefits similar to a partnership but also have limited liability exposure. While this seems very similar to a limited partnership, there are significant legal and statutory differences.
- General Corporation: Also known as a C corporation, a general corporation is a legal entity, operating under state law, whose scope of activity and name are restricted by its charter. Articles of incorporation must be filed with the state to establish a corporation. Stockholders are protected from liability, and those stockholders who are also employees may be able to take advantage of some tax-free benefits, such as health insurance. There is double taxation with a C corporation, first through taxes on profits and second via taxes on stockholder dividends (as capital gains).
- S Corporations: Subchapter S corporations are special closed corporations (limits exist on the number of members) created to offer small corporations a tax advantage, if IRS Code requirements are met. Corporate taxes are waived and reported by the owners on their personal federal income tax returns, avoiding the “double taxation” of regular corporations.
- Non Profit Corporations: Nonprofits are incorporated under the laws of the state in which they are established. To receive federal tax-exempt status, the organization must apply with the IRS. Two applications are required. First, you must request an Employer Identification Number (EIN) and then apply for recognition of exemption by filing Form 1023 (Charitable Organizations) or 1024 (Other Tax-Exempt Organizations), with the necessary filing fee. The IRS identifies the different types of nonprofit organizations by the tax code by which they qualify for exempt status. One of the most common forms is 501(c)(3), under which are set up those organizations which do charitable, educational, scientific, religious and literary work. This includes a range of organizations, from continuing education centers to outpatient clinics and hospitals.
- Professional Corporations: A professional corporation is a variation of the corporate form available to entrepreneurs who offer professional services—such as doctors, lawyers, accountants, consultants, and architects. Some states require professionals to form this type of entity if they wish to incorporate. In a professional corporation, the owners perform services for the business as employees.
Whether you are setting up a sole proprietorship, a California corporation, LLC, nonprofit or partnership, it is important to make sure your business documents are in proper order. Once you have decided how you want to set up your business, A People’s Choice can assist in making sure that your paperwork is quickly prepared to get your business up and running.