The Governor's Office of Business and Economic Development provides a checklist of key decisions that need to be made by Californians planning to start a business. While the checklist covers the process from researching and planning to registering for taxes, it includes choosing a business structure.
The significance of your choice
Choosing the structure of your business deeply affects your filing obligations, personal liability and tax obligations. We will briefly highlight the main distinguishing characteristics of the following types of California business structures:
With a sole proprietorship, an individual has complete control of the operation, derives full financial benefits and assumes full responsibility for taxes and liabilities. It is formed under a business name in the county where the business is located.
Formed by two or more persons engaged in business for profit, the business is not a separate entity but a sharing of profit and loss. Partners enter into an agreement that defines their business relationship. Partners are jointly and severally liable for financial and legal obligations of the business. A Statement of Partnership of Authority may be filed with the Secretary of State.
When two or more people enter into an oral or written agreement to form a partnership whereby one person acts as a general partner with increased management authority and personal liability and at least one other partner acts as a limited partner with very little authority, a limited partnership is formed. While general partners manage and control the business, they also assume most of the financial and legal risks. All limited partnerships must file a Certificate of Limited Partnership with the state.
Limited Liability Partnership (LLP)
This is a special business structure for accountants, lawyers and architects who are licensed under California law for their respective practice. LLPs provide a degree of protection against personal liability. LLPs are flexible and partners may agree to their management rights and financial obligations. In addition to filing a Registered Limited Liability Partnership Registration, California law provides for additional requirements when forming an LLP.
Limited Liability Company (LLC)
Classified as a partnership or a corporation for tax reasons, the LLC provides a separate legal existence liability protection to its owners. Members of the LLC must sign an operating agreement. An LLC may be managed by members or by managers who are not members. An LLC is registered by completing the Articles of Incorporation and filing it with the Secretary of State.
Managed by a board of directors, a corporation is a separate legal entity owned by shareholders. The owners have no personal liability for the operations of the corporation. The Articles of Incorporation must be completed and filed with the Secretary of State.
Before choosing a business structure for your new California business, it is recommended that you consult with an experienced California corporate attorney who will explain in detail the advantages and disadvantages of each structure.