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