Business Entity Formation Law in San Diego
Most individuals who operate a business or participate in investments don’t understand the differences between operating as a sole proprietor versus the different business entities available to them. By choosing to form and operate under an entity (i.e. corporation, LLC, partnership), business owners and investors protect themselves and are able to organize their interests more effectively. The different entities include:
Simply put, a sole proprietorship is a form of business in which one person is in business to make money. This person owns all the assets of the business, and is solely liable for all the debts the business incurs. If you have not formally set up a business entity, you probably own your business as a sole proprietor. Although there are minimal costs to operate as a sole proprietor, the business owner is afforded no form of protection from any liability arising out of the business. Many small business owners operate this way and do not understand the advantages that come from operating as a formal business entity. Speaking with an experienced business attorney can help you to understand your options to help minimize exposure and maximize your interests. This consultation should occur before the business is started.
There are two main types of partnerships. The first is a General Partnership (GP) and the other is a Limited Partnership (LP). Choosing one or the other generally depends on the amount of control and exposure to liability you wish to have. As a general partnership, two or more persons come together to operate a business. The partners do not need to meet any formal requirements to operate this way. However, all partners will be jointly and severally liable. As a limited partnership, partners must satisfy some filing requirements. In a limited partnership, partners may either have limited liability but limited control, or general liability but control of decision making. Partners will need to execute a partnership agreement and file for a certificate of partnership.
In both types of partnerships, a written Partnership Agreement is strongly recommended. It is important to execute this agreement to memorialize the intentions of the parties. Without this agreement, default rules will apply that may not align with the partners needs.
A third type of partnership is a Limited Liability Partnership (LLP). In California, this type of partnership is limited to licensed professionals only (architects, attorneys, and accountants). Partners of an LLP have no individual liability for partnership debts arising from errors or negligence from another partner. This may or may not apply to you.
Limited Liability Companies (LLC’s)
A limited liability company (LLC) is an attractive business entity because members are not personally liable for the debts, liabilities and obligations of the LLC. The members are only liable for the amount they have contributed to the LLC. In addition, LLC’s offer a lot of flexibility in accommodating members interests, even if their interests are different. LLC’s also allow the members to elect to be treated as a partnership or corporation for taxation purposes. Electing to be treated as a partnership for taxation purposes allows the members of the LLC to avoid the “double taxation” the corporate structure presents. In order to form an LLC, there are several requirements that must be met. These include filing articles of organization with the Secretary of State, executing an operating agreement, and paying an annual franchise tax. An attorney can help you through this process, and can draft an operating agreement between the members of the LLC to accommodate their needs.
In California, “C” corporations and “S” corporations are common. A “C” corporation is a default corporation that must satisfy certain minimum requirements, such as filing articles of incorporation, bylaws, and holding organizational meetings. Under a “C” corporation, the corporation is taxed separately from its owners, i.e. “double taxation.” In order to avoid “double taxation,” shareholders may opt to elect their corporation an “S” corporation. This election allows the corporation to avoid taxes, eliminating the “double taxation” issue, and subjects only the individual shareholders to pay taxes on their pro rata share of income. One requirement for an “S” corporation is that the corporation’s shares cannot be held by foreign individuals.
Other types of corporations our office has formed include:
- Close corporations
- Professional Corporations
- Non Profit (501c3) Corporations
For more information about Business Entity Formation, please call us at 619-441-2500 for a free consultation or send us a message for a free case evaluation.