6th Feb 2013
If you are starting a business, one of your critical initial decisions is the form of business entity. Would you like to go on a sole proprietorship? Or a partnership? Or form a corporation? In California, there are actually six major forms of business entities, namely: sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability companies, and corporations. And the differences among them involve not just owners, but, more importantly, your extent of liability as well as your control over the enterprise. That is why it is prudent to consult a business planning attorney for when you are starting your business.
Below are the major features of each business entity:
Corporation. A corporation is a legal entity which has a distinct legal personality from its owners. This distinction protects the owners from personal liability. Taxes are levied on the corporation as well as on the shareholders – but not on the principal owner.
Under a corporation, there are still many subtypes such as C-Corporations, S-Corporations, professional corporations, etc. Hence, if you are considering forming a corporation, you must seek the advice of a business planning attorney from Orange as to which subtype best fits your needs.
Limited Liability Company (LLC). An LLC is similar to a corporation in that it offers protection from liability for the principal owners. An LLC however has a different tax structure.
Limited Partnership (LP). An LP can provide liability protection only for certain partners. A California LP is composed of one general partner and at least one limited partner. The general partner acts as the controlling partner while the limited partners play a secondary role. The general partner has an unlimited personal liability for the LP’s debts and obligations while the liability of the limited partners is limited by their contribution or participation.
General Partnership (GP). In this business entity, there are at least two individuals doing the business for profit. Generally all partners on a GP are liable jointly and severally for all obligations. When a GP makes a profit, the proceeds are deemed as the personal income of the partners.
Limited Liability Partnership (LLP). An LLP can only engage in certain businesses, which are: public accounting, law, architecture, engineering, land surveying or one that provides service or facilities to a registered California LLC engaged in law or accounting or to a foreign LLC. An LLC thus has to maintain a certain level of insurance to main operations.
Sole Proprietorship. A sole proprietorship is the ownership by one individual. The sole proprietor has absolute control in the operations of his company; he takes in all the profits. But he alone also is liable for all the taxes and other obligations.
You will note that the key differences among the six play on the extent of control by the owner and the extent of his liability. This only underscores the importance of consulting a business planning lawyer when you are considering your business entity.