Whether you are just getting started or buying a company, choosing the appropriate business entity is a critical first step. Which type of entity works best for you will depend on a variety of factors, which you will want to discuss with an experienced business law attorney. In most cases, forming a business entity can limit or eliminate your personal liability for the company’s liabilities. There are also tax advantages in setting up certain types of legal entities. Other benefits can include: making it easier to obtain credit for your business, attracting a larger pool of investors, and reducing administrative burdens and costs. No matter what your objectives are, we can help!
The business attorneys at Gehres Law Group, P.C. will assist you in determining what type of business entity best suits your needs. There are many forms a business may take, but the most common types of business entities available in California are provided here.
Common Business Entities
- Sole Proprietorship. A sole proprietorship involves an individual doing business in his or her individual name. It is a simple and flexible form of doing business, but offers no protection to the individual with regard to their personal assets against business creditors. However, some of the potential negative effects can be mitigated by prudent estate planning and the creation of other entities to protect the owner’s personal assets.
- Partnership. A partnership is an agreement between two or more persons to share the profits and losses of a business enterprise. It is a flexible business form and can often provide protection of the partners’ personal assets against business creditors, if structured properly. A partnership may be either a General Partnership or a Limited Partnership, depending on the owners’ objectives. There are special considerations if the partnership is owned by professionals. In some instances, California law requires a Limited Liability Partnership or LLP to be formed.
- Corporation. A corporation, sometimes called a “C corporation”, is a formal type of business entity, created under the California Corporations Code, which protects its shareholders from the liability of business debts unless the shareholders personally guarantee such debts. However, corporate dividends are typically subject to unfavorable tax treatment. In addition, there are time and expense considerations in maintaining a corporation, which do not exist with some other business formations.
- Limited Liability Company. For many small businesses, this is the most attractive type of entity. Members, not shareholders, typically enjoy the same liability protection of a corporation, but do not encounter unfavorable tax treatment and some of the expenses and administrative burdens required of a corporation. For more information on LLC’s, see our related blog article here.
- S Corporation. An S Corporation is not a type of entity which can be formed through the California Secretary of State’s Office. Unlike other types of business entities, it is a type of tax election a company may make with the Internal Revenue Service, which indicates the owners have chosen to be taxed in a way which is different from the default treatment by the IRS for their type of entity.
Other less common types of business entities that are available in California are: Limited Liability Partnerships and Professional Corporations. If you are a licensed professional, call us to learn more about forming one of these business entities.
More About Electing S Corporation Status
Many of our business clients want to know more about electing S Corporation status for their company which is available to most entity types, including C corporations. Click here to learn more about the requirements to qualify for S Corp status and the benefits of making such an election with the IRS. Essentially, an S Corporation is a pass-through entity meaning that income and losses pass through the corporation to its owners’ personal tax returns. S Corporations report their income and deductions much like partnerships.
For a company which has formed as a C Corporation, the shareholders can avoid the potential for double taxation by electing S Corporation status. In addition, losses sustained by a corporation which has elected S Corporation status can offset other income its owners may report, making an S Corporation election helpful in reducing the owners’ personal income tax liability during the start-up phase of the company.
For single-member and multi-member LLC’s, the primary advantage of S Corporation status is this: S Corporation tax treatment can provide a way to take money out of your business without paying self-employment taxes. This is because you do not have to pay self-employment tax on distributions (dividends) from your S Corporation—that is, on earnings and profits that pass through the corporation to you as an owner, not as an employee as compensation for your services. The larger your distribution, the less employment tax you’ll pay. Therefore, an S Corporation tax election makes it possible for owners of LLC’s to save on Social Security and Medicare taxes. This is the main reason S Corporations have been, and remain, popular with business owners.
Business Formation Questionnaires
If you are starting a business and have decided to hire the business lawyers at Gehres Law Group, P.C., please download the appropriate Business Formation Questionnaire below and save it to your computer or external drive. Please note that while these forms are fillable, you cannot save your information without first saving the document to your hard drive and opening the form from your hard drive.
Our Trusted and Experienced Business Formation Lawyers
The business and corporate law attorneys at Gehres Law Group, P.C. serve all of Southern California and are experienced in assisting clients in determining which type of business entity is right for their needs. You will also have the peace of mind as your business grows, that our lawyers are there to partner with you to protect your company’s best interests above all else. Whether you need corporate law services, contracts, trademark or copyright registration or litigation services, commercial law or employment law advice, or other business-related litigation services, you will know your business has the advantage of 80+ years of legal knowledge and experience behind it.