20th Nov 2012
When you start a new business, one of the first things you will need to do in order to legalize the business is set up a legal entity for it. Now, just as with estate planning, there is no one size fits all approach to setting up you business legal entity. Different situations require different types of entities.
For example, in California alone there are several forms of business entities, each with its own advantages and disadvantages such as:
· Corporations, including S-Corporations
· Limited Liability Companies (LLCs)
· Limited Liability Partnerships (LLPs)
One advantage to hiring an attorney that knows estate planning well for your business planning is that they understand tax advantages and can help better advice you on the best structure for the business to save the most money down the road. They will be able to help in other areas of the planning such as business succession planning.
This refers many different business documents that may be needed in order for members of the company to buy or sell stock, agreements between shareholders, gifting, and family limited partnerships among other things. This is crucial especially in a business where there are several partners involved. There needs to be a plan devised as well for what happens should one of the members become incapacitated or passes away. What happens to their shares?
A business is usually your biggest asset. This provides for you, your family, and your employees and hopefully through income earned in the business this will allow you to accumulate other assets. This is why it is so important to protect your biggest asset the best way possible by incorporating the correct business structure in place.
As we all know in the business world, many things can happen and you will want the maximum protection to ensure you don’t lose your biggest asset which provides for you and your family.
If you have questions on the different business entities and what they mean here is a brief description of each taken from the state of California Franchise Tax Board:
An LLC is a newer form of business entity. It has advantages over corporations and partnerships. The LLC’s main advantage over a partnership is that, like the owners (shareholders) of a civil law corporation, the liability of the owners (members) of an LLC for debts and obligations of the LLC is limited to their financial investment. However, like a general partnership, members of an LLC have the right to participate in management of the LLC, unless the LLC’s articles of organization and operating agreement provide that the LLC is to be managed by managers.
For California income tax purposes, an LLC with more than one member will be classified as a partnership, and an LLC with a single individual member will be treated as a sole proprietorship, unless the LLC chooses to be classified as a corporation for income tax purposes. To be taxed as a corporation, the LLC files an election on a Form 8832, Entity Classification Election, with the Internal Revenue Service. California treats the LLC and its owners for income tax purposes in the same manner the LLC is treated for federal tax purposes.
Sole Proprietor: This is the simplest and most common form of starting a new business. It has no existence apart from its owner. A sole proprietorship consists of only “one” individual; ownership by more than one person creates a partnership. (Note: A husband and wife can be classified as a sole proprietorship. A business conducted by registered domestic partners must be classified as a partnership.)
An LLP is a form of ownership in which all the partners receive limited liability protection. However, an LLP is similar to a general partnership in that all the partners can take an active role in managing the day-to-day affairs of the business. The LLP form of ownership is limited in the State of California to persons licensed to practice in the fields of public accountancy, law, or architecture.
In order to form in California, an LLP must first register with the California Secretary of State. An LLP formed in another state must register with the California Secretary of State prior to conducting business in the state.