Choosing an Entity Type

When starting a business in California, it’s crucial that you consider not only your immediate business goals but also the long-term advantages and disadvantages of the entity type you choose. Among these considerations are the financial, legal, and tax implications of the entity type in question.

Consider this page your quick reference guide to California business entities. Also understand that these facts merely scratch the surface. To learn more about the potential benefits and pitfalls of each option, we invite you to reach out and schedule an in-depth consultation with one of our attorneys.

Corporations

In California, corporations are considered legal entities that exist separately from their owners. This benefits you as an owner for three key reasons:

  1. It limits your personal liability regarding the company
  2. You can collect additional capital by selling stocks or bonds
  3. The company can continue even in the event that you leave the company (or pass away)

Of course, every business entity has its own tax considerations. Although the corporation entity type can limit your liability, you should know that taxes are levied on both the corporation and the company’s shareholders. Additionally, corporations can fall prey to double taxation — meaning that after paying federal and state taxes on its profits, the corporation is taxed again as dividends are paid to shareholders.

Even within the corporation category, there are a number of entity types to choose from depending on the unique needs and goals of your business. We at Marc A. Bronstein A Professional Law Corporation can help you determine whether any of the following options is right for you: general stock corporation, close corporation, professional corporation, S corporation, C corporation, or non-profit corporation.

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Limited Liability Companies (LLCs)

As their name suggests, Limited Liability Companies protect you from liability — much in the same way that corporations do. Unlike corporations, though, LLCs are much more flexible in terms of taxation and profit distribution. Since losses, profits, and general expenses “flow through” to individuals within the company, you get to avoid the double taxation of corporate and individual tax.

Among the disadvantages of choosing an LLC are their limited lifespans and complex tax considerations. In other words, your business will dissolve in the event of bankruptcy or the loss of an owner. As for tax considerations, there are a number of hurdles you may have to jump to ensure your business is protected. That’s where a knowledgeable lawyer can make all the difference.

Partnerships

If you’re forming your business with one or more partners, your first instinct may be to go the partnership route. Of course, you know to do your homework before making that decision. In California, there are three types of partnerships — each of which has its unique advantages and disadvantages:

  • General Partnerships (GPs). GPs offer the same “flow through” benefit as you would get with an LLC — meaning that income, deductions, and credits go to you directly. On the negative side, GPs don’t protect you from liability. You are personally responsible for any debts incurred by you or your partner(s).
  • Limited Partnerships (LPs). LPs allow you to form your business with a combination of active contributors (“general partners”) and passive investors (“limited partners”). While general partners are responsible for the management of the company and hold 100% liability for it, limited partners have no liability outside of their financial contributions. In turn, limited partners have no say in the management of the business.
  • Limited Liability Partnerships (LLPs). LLPs are only an option for certain occupations, like law, medicine, public accountancy, architecture, and engineering. If your startup will offer a service of this nature, ask us for more information about this entity type.

Again, just because you have partners doesn’t mean you’re stuck with the partnership entity type. Talk to us about all of your options before taking that plunge.

Sole Proprietorships

Since sole proprietorships put all of a company’s liability and responsibilities on one single person, it’s rarely an entrepreneur’s first choice. Still, if you’re starting a business on your own, we would be happy to discuss this possibility with you in further detail.

Santa Monica Business Formation Attorneys

How you handle your business formation sets the pace for your company for years to come. At our firm, we don’t take that responsibility lightly. Not only will we help you make informed decisions about which entity type to choose; we will also put our legal, entrepreneurial, and tax experience to work in order to help you avoid potential pitfalls. Contact us today to set up a consultation.