Making the decision to start your own business can feel exciting and overwhelming all at once. In addition to getting essential operations up and running, you’ll need to pay attention to several important legal and financial considerations, including choosing the appropriate legal structure that is a good fit for your business.
The type of business entity you choose will determine the extent of your personal liability, the types and amounts of tax you will owe, and the types of paperwork you will be required to file with government agencies.
Below, we’ll discuss the primary types of business entities in California and how an attorney at can help you determine which structure is the right choice for you.
What Are the Major Types of Business Structures in California?
Forming a business often begins with a basic question: What type of business structure is right for your venture? Having the right type of business entity will make it easier for your business to operate, grow and thrive. The entity you choose may make your business more attractive to customers, vendors, investors, lenders and possible strategic partners.
When you start a business in California, you can choose from multiple types of entities including:
- Sole Proprietorship
A sole proprietorship allows an individual to own and operate a business. The owner enjoys all profits of the business and has total control over the business. However, the uncomplicated nature of a sole proprietorship also has its drawbacks. Because there is no legal distinction between sole proprietors and their business operations, sole proprietors take on personal responsibility for all debts, obligations, and other liabilities of the business.
This means creditors of a sole proprietorship can go after the personal assets of the owner. A sole proprietor is also not legally protected if someone decides to sue their business.
All profits generated by a sole proprietorship are subject to a self-employment tax. A sole proprietorship is not considered a separate legal or tax entity. As a result, owners report their income on their personal 1040 income tax returns.
- General Partnership
A general partnership (GP) can be formed by two or more individuals who expressly or implicitly agree to go into business together for profit. While it’s always recommended to create and file a written partnership agreement, GPs can be formed without one.
As in sole proprietorships, profits and losses in GPs go directly to the partners in proportion to their share of ownership. A partnership allocates its profits and losses to its partners, who then report this information on their individual tax returns.
Each partner in a GP faces unlimited personal liability for the business. Business creditors can pursue assets of partners when they come to collect, and each partner can be held individually and jointly liable for the actions or obligations of any other partner.
To register a GP in California, the partners file a Statement of Partnership Authority with the California Secretary of State’s office. Registration is not mandatory, however.
- Limited Partnership
A California limited partnership (LP) involves both general and limited partners. General partners in an LP have management control over the business, a proportional share of all business profits and losses, and individual liability for all partnership debts and obligations.
Limited partners in this type of structure have little or no management control over the LP, so their liability is limited based on the amount they invest in the partnership. Limited partners must take care to avoid comingling their personal and partnership assets.
The nature of an LP makes it easier to attract investors since general partners are not forced to give up management control and limited partners are able to invest without risking personal assets. In this way, limited partners are comparable to corporate shareholders.
LPs are taxed the same as general partnerships: profits and losses are passed to partners, who report them on their individual income tax returns. Profits and losses are allocated based on their amount of ownership interest.
LPs must also pay a minimum annual state franchise tax. However, LPs pay no federal business income taxes. Unlike with GPs, the formation of an LP requires a formal filing with the California Secretary of State’s office including the disclosure of select information about your business.
- Limited Liability Partnership
A limited liability partnership (LLP) is a relatively new type of legal structure in California that is currently only available to certain types of licensed professionals, including accountants, lawyers, and engineers.
The structure of an LLP protects individual partners from personal liability for business debts, obligations of the partnership, and negligent acts committed by other partners. There are no general partners in an LLP.
Profits and losses of an LLP are passed through directly to the partners in proportion to their share of ownership. Partners in an LLP must pay taxes on their individual tax returns. The LLP itself is subject to the state minimum annual franchise tax. LLPs are not required to pay federal business income tax as long as they meet specific criteria that allow them to avoid incurring corporate taxes.
Unlike limited partners in an LP, LLP partners have the right to make management decisions about the partnership’s operations. These entities must register with the state.
- Limited Liability Company
A limited liability company (LLC) provides members with protection from business liabilities and the option to allow profits and losses to be passed on directly to members. LLC members’ personal assets are not typically vulnerable to a lawsuit against the business.
California LLCs are owned by their members, who can manage the company directly or pass that responsibility on to designated managers.
LLCs also have flexibility to be taxed as a sole proprietorship, partnership, C corporation, or S corporation. Nontheless, California LLCs are also required to pay the state’s minimum annual franchise tax.
Owners must establish an LLC Operating Agreement to define the relationship between members. LLC members must also make certain disclosures to the government, which are then made available to the general public. Further, LLCs are not able to issue stock the way a corporation can, thus making investment opportunities more limited.
- S Corporation
An S Corporation is a unique type of corporation in which business owners elect to treat the company as a pass-through entity, which means S corporations are not subject to federal business income taxes. However, shareholders in an S corporation are still protected from personal liability if the corporation is sued.
Owners of an S corporation who perform services for the business are considered employees as well as owners of the business. They must be paid a reasonable wage compared to employees in similar positions in their profession. The owners report these wages as regular W-2 employee wages. They also receive a share of profits, and they are taxed on these distributions. Dividing the income in this way can sometimes allow a business owner to save in self-employment taxes.
An S corporation can attract investors by selling stock in the corporation, though S corporations are not permitted to go public the way C corporations can. S corporations must disclose substantial business information to government agencies and prepare specific types of tax filings.
- C Corporation
C corporations are the most common and well-known types of business entities. These traditional companies are owned by shareholders, who are protected from liability for the company’s business losses and obligations. California C corporations are managed by boards of directors, which appoint corporate officers to manage the company’s business operations.
Owners of C corporations can file for business tax deductions for things like business equipment, insurance, and employee expenses. C corporations can sell ownership shares including making a public stock offering to accumulate capital for expansion or to retire debt.
C corporations are required to file formal articles of incorporation and to disclose select business information to the government. Profits are typically taxed separately under the corporation’s name.
The most significant drawback to forming a C corporation is the concept of double taxation. The profits of a corporation are taxed twice, once as business profits and again as stockholder dividends through the capital gains tax.
How to Choose the Right Entity for You
To determine which type of California business entity is right for your situation, you should consider the following factors:
- The type and pace of growth that you envision for your business
- The level of personal liability you are willing to accept on behalf of your business
- How your business will be taxed at both the state and federal level
- How complex it will be to establish your business as a legal entity
- Whether you and other owners want to retain primary control of the business
- Whether you intend to pursue external funding from investors or banks
- The type of licenses, permits, and regulations with which your business may be required to comply
Assisting with General Business Operations
At Business Estate & Tax Attorneys, P.C., helping with your business formation needs is only one of the services we provide. We are committed to help you with the legal side of the day-to-day operation of your company as well if you need us.
Our firm can provide legal assistance for a wide variety of business operations needs, including employment matters, property issues and regulatory problems. We can also stand with your company when it faces legal disputes by efficiently and expeditiously pushing for cost-effective solutions to resolve expensive litigation and other legal issues.
Among the business operational issues that our firm can help with include the following:
- Drafting and executing corporate resolutions
- Keeping minutes for board and corporate meetings
- Drafting and enforcing independent contractor agreements
- Drafting and enforcing employment agreements
- Drafting employee handbooks
- Preparing employee counseling statements and advising your business on employee disciplinary matters
- Helping your business establish employment performance review and evaluation procedures
- Drafting and executing deferred compensation agreements
- Drafting and enforcing non-disclosure agreements, non-compete agreements, and non-solicitation agreements
- Reviewing and executing equipment lease agreements
- Reviewing and executing commercial real estate lease agreements
Analyzing and Structuring Merger, Acquisition & Buyout Opportunities
At some point on your business’s journey, you may find it necessary to consider a merger with, or acquisition of, another business or you may need to explore questions and legal issues if another business wants to buy your company.
Business mergers, acquisitions and sales can be legally complex and time-consuming. Business Estate & Tax Attorneys, P.C. can provide your company with the legal advice you need to successfully navigate these important crossroads in your business career. We can help ensure that any corporate transaction proceeds as smoothly as possible and that your business interests are fully protected.
Among the M&A legal matters we can help you with include:
- Buy-sell agreements
- Equity purchase letters of intent
- Equity purchase agreements
- Pledge agreements
- Redemption agreements
- Asset purchase agreements
Our firm can also guide you throughout an M&A or buyout process by:
- Helping you seek out and evaluate transaction partners
- Helping you field requests to exercise redemption or buyout clauses
- Helping you negotiate deal terms and term sheets
- Helping you draft and execute appropriate protections such as non-disclosure agreements and exclusivity agreements
- Assisting you during due diligence process (including requesting due diligence from the other party and responding to due diligence requests)
- Advising you through board, shareholder and partner approvals
Critical Tax Planning for Your Business
Business Estate & Tax Attorneys, P.C. will devise the best possible tax strategies for your business. We will work diligently to lower your business’s tax liabilities and help to ensure that your business complies with local, state and federal tax laws by helping you with:
- Electing business taxation status (such as disregarded entity status, partnership, Subchapter S, or Subchapter C)
- Preparing and filing tax returns
- Consulting on payroll taxes and withholdings from employee paychecks
- Helping structure retirement and benefit plans for yourself or your employees
- Crafting and overseeing the operation of employee equity plans
- Paying use and excise taxes
- Collecting sales tax on sales
- Taking advantage of the timing of income and expenses
- Declaring depreciation of assets
- Using qualified business income deductions
The tax laws provide businesses with several tools to reduce tax liabilities. However, the tax codes are complex, and they can also pose traps for the unwary and uninformed. Failing to collect and remit a required tax or taking the wrong deduction can lead to legal problems and expenses for you and your business.
Let us advise you on your business decisions and help you develop strategies that minimize your tax burdens. We can provide counsel to ensure that you collect and pay the taxes your business owes under the law.
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How a San Francisco Business Attorney Can Help
The lawyers at have the legal knowledge and experience needed to help you make the best decisions for yourself and your business. We provide competent, responsive professional services to California business owners who need help planning for the future.
Contact us today for a free consultation to discuss your situation with one of our qualified business attorneys. At Business Estate & Tax Attorneys, P.C., we will provide clear information about your options and assist you in making the best decisions for your business.
The difference between LLC and PC is straightforward. A limited liability company (LLC) combines the tax benefits of a partnership and the limited liability protection of a corporation. A professional corporation (PC) is organized according to the laws of the state where the professional is licensed to practice.Can an attorney form an LLC in California? ›
The short answer: no. Lawyers in California, along with a set of other professionals, are prohibited from forming a California LLC, or LLC formation. In other states, professionals are required to start PLLCs, Professional Limited Liability Companies, instead.Is it important to consult a business law attorney for the starting of a new business? ›
They can help you right from the day you have a "blueprint" of your business plan to the day your business roars in the market... and even afterwards. A competent business attorney helps you give a picture of business law which would be clear as a crystal.Do law firms need a business license California? ›
The state of California doesn't require or issue a state-wide business operating license. Instead, it regulates some industries and professionals, like doctors, lawyers, and accountants. You likely have to get a business operating license from your city or county, though requirements vary.Is LLC worth it in California? ›
Is LLC Worth It in California? Having an LLC in California offers liability protection, which is worth the additional costs. In addition, an LLC protects all of your assets should your business get sued or be unable to pay its debts.What is the downside to an LLC? ›
Disadvantages of creating an LLC
States charge an initial formation fee. Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Check with your Secretary of State's office. Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation.
Every LLC that is doing business or organized in California must pay an annual tax of $800. This yearly tax will be due, even if you are not conducting business, until you cancel your LLC. You have until the 15th day of the 4th month from the date you file with the SOS to pay your first-year annual tax.How do I avoid LLC tax in California? ›
Can I avoid the California Franchise Tax? There's no way for a registered business to legitimately avoid the California Franchise Tax. Sole proprietors and general partnerships don't have to pay the California Franchise Tax, but they also don't have any personal liability protection.How much does it cost to file an LLC in California? ›
California LLC Fee
The CA LLC fee is $85, payable to the secretary of state. In addition, a California LLC fee is also due for the statement of information, a document that must be submitted within 90 days of LLC formation and carries a filing cost of $20.
- Being afraid to fail. ...
- Not making a business plan. ...
- Being disorganized. ...
- Not defining your market and target audience. ...
- Not filing for the proper legal structure. ...
- Trying to do everything yourself. ...
- Partnering with the wrong investors. ...
- Avoiding contracts.
- Incorporation. There are many benefits to incorporating your startup, and it's a business structure that works well for many founding companies. ...
- Reviewing contracts. ...
- Shareholder agreements. ...
- Founders agreements. ...
- Stock Option Plans. ...
- Mergers and acquisitions. ...
- Privacy policies. ...
- Resolving claims.
When to Ask for Legal Help
- Business Structure. ...
- Intellectual Property. ...
- Client and Supplier Contracts. ...
- Hiring Employees.
Business entity filing is not necessary for sole proprietors, but if you intend to form a corporation, limited liability company or partnership, you must file with the California Secretary of State(SOS). All businesses are required to file state income tax with the Franchise Tax Board(FTB).Can you do business in California without a business license? ›
Virtually all businesses will need at least one type of license or permit to legally operate in the state of California.What happens if you operate a business without a license in California? ›
Failure to obtain a Business License is a violation of Title 7 of the County of Los Angeles Code and a misdemeanor. Continued failure to comply with the requirements of Title 7 will result in fines and possible legal action.Do I have to pay taxes on an LLC that made no money California? ›
It is mandatory for all corporations to file annual tax returns, even if the business was inactive or did not receive income.
Traditionally, yes. However, because of California Assembly Bill 85, LLCs formed between 2021 and 2024 don't have to pay the $800 California LLC fee the first year. Instead, your first $800 LLC fee will be paid the year after your LLC is approved. The fee is due by April 15 every year.How fast can I form an LLC in California? ›
You can form an LLC in California in 3-5 days if you file online (or 2-3 weeks if you file by mail).Is an LLC worth it for tax purposes? ›
An LLC can help you avoid double taxation unless you structure the entity as a corporation for tax purposes. Business expenses. LLC members may take tax deductions for legitimate business expenses, including the cost of forming the LLC, on their personal returns.Are you financially liable in an LLC? ›
What Type of Liability Protection Do You Get With an LLC? The main reason people form LLCs is to avoid personal liability for the debts of a business they own or are involved in. By forming an LLC, only the LLC is liable for the debts and liabilities incurred by the business—not the owners or managers.
Statement of Purpose.
Most states do not require you to be specific about the purpose of your LLC. Instead, a statement such as "The purpose of the Limited Liability Company is to engage in any lawful activity for which a Limited Liability Company may be organized in this state" is usually sufficient.
The Franchise Tax Board will eventually refer your business to a collection service (and their fees will be tacked on to our bill) and file a lien against your business. Finally, your business can be suspended by the Franchise Tax Board.
If you have $50,000 or less in startup costs and are in your first year of business, the IRS allows you to deduct $5,000 in startup costs and $5,000 in organization costs as a tex deduction. If your startup expenses exceed $50,000, the total deduction will be reduced by however much your expenses exceed $50,000.How do I start an LLC in California for free? ›
To form an LLC in California, go to bizfileOnline.sos.ca.gov, log in, select Register a Business under the Business Entities Tile, Articles of Organization - CA LLC and follow the prompts to complete and submit.Does LLC protect personal assets in California? ›
Understanding an LLC's limited liability protection
The owners' personal assets such as cars, homes and bank accounts are safe. An LLC owner only risks the amount of money he or she has invested in the business.
A general Corporation making a Subchapter “S” Election or an LLC with or without a Subchapter S Election pays no federal tax on its taxable income and no employment taxes on its distributions to stockholders.What businesses can't be an LLC in California? ›
In most states, licensed professionals (architects, accountants, doctors, lawyers, therapists, etc.) offering professional services cannot form a “regular” California LLC, but instead must form a Professional LLC (PLLC).How much is a business license in California? ›
In general, most CA small businesses will pay between $50 and $100 for a general business license. Larger corporations may be subject to charges based on their projected revenue.Is CA LLC fee based on income? ›
LLC Fee. LLCs are subject to an annual fee based on their total income "from all sources derived from or attributable to California" (R&TC Section 17942).How long does it take to get a business license in California? ›
How long does the approval process take? Review and investigation of a completed license application may take up to 45 days for a General Business License. An application is considered completed when all required information and fees have been submitted.
- What does your business do? ...
- Who is your target customer? ...
- How will you make money? ...
- What niche are you filling?
The first rule of business is: Don't mess with people's pay. Good employees understand how important it is to keep the customer satisfied.What is the best legal structure for a startup? ›
If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice. You can negotiate such control in a partnership agreement as well. A corporation is constructed to have a board of directors that makes the major decisions that guide the company.How much is a startup attorney? ›
Updated September 6, 2021: The small business lawyer cost can range from $150 per hour for junior lawyers to over $1,000 per hour for senior partners at large firms in major cities. You will also need to consider that sometimes there will be a group of lawyers working and not just one per case.What legal services do startups need? ›
- Venture Financing Documents. Seed financing and funding rounds are a key step in any startup companies life cycle. ...
- Liability Protection. ...
- Entity Formations. ...
- Mergers & Acquisitions. ...
- Blockchain. ...
A Business Lawyer is an attorney who focuses on providing legal advice to business owners on issues that affect businesses, such as taxation, business transactions, and intellectual property rights. The Business Lawyer may also be known as a Corporate Attorney, Corporate Lawyer, or Commercial Lawyer.What are the four types of ownership? ›
- Sole Proprietorship.
- General Partnership.
- Limited Liability Company (LLC)
- Corporations (C-Corp and S-Corp)
Rule 47 provides that an advocate shall not personally engage in any business; but he may be a sleeping partner in a firm doing business provided that in the opinion of the appropriate State Bar Council, the nature of the business is not inconsistent with the dignity of the profession.Can I run a small business without registering? ›
You are allowed to operate a sole proprietorship without registering, but you are required to register with your local government to collect and file state taxes. There is nothing wrong with running an unregistered business as long as your business is legal and meets all licensing and tax requirements.Can I run a startup without registering? ›
Is it mandatory to register a company before starting a business in India? The answer is no!
The Business Permit is an important compliance document for businesses in the Philippines. Registered businesses should not be operating without having an up-to-date Business Permit or else they will face potential sanctions including fines, penalties and business closure.Do I need a business license for a home-based business in California? ›
Local business licenses in California
Many California counties require businesses to obtain a business operating license before doing business in the county. This requirement applies to all businesses, including one-person, home-based operations.
California Seller's Permit: If you are doing business in California and intend to sell or lease tangible personal property subject to sales tax sold at retail, you are required to have a seller's permit and prominently display it at your place of business.What are the steps to starting a business in California? ›
- Choose a Business Idea. ...
- Decide on a Legal Structure. ...
- Choose a Business Name. ...
- Register Your Business Entity. ...
- Apply for California Licenses and Permits. ...
- Pick a Business Location and Check Zoning Regulations. ...
- Register and Report Taxes. ...
- Obtain Insurance.
After the completion of the Chartered Accountant course, the aspirants can become either employed in a firm as an employee or can start their own private practice. If you want to start up your own business, then firstly you need to learn about the important terms and conditions of Business.Who is required to register to do business in California? ›
Any entity that is “doing business” within the scope of the tax laws in California, or that has registered under the corporate regime described above with the California secretary of state, must file an annual franchise tax return and pay a minimum annual tax (currently $800 and commonly called a “franchise tax”) “for ...What happens if a business isn't registered? ›
If you decide to start a business but do not actually register it, you are considered a sole proprietorship or sole trader. What this means is that you will need to use your personal social security number and your personal legal name to conduct business.Is there anything better than an LLC? ›
In general, corporations have a more standardized and rigid operating structure and more reporting and recordkeeping requirements than LLCs. LLC owners have greater flexibility in how they run their business.Which is better EIN or LLC? ›
Why You Should File for LLC Before EIN. It's necessary to file for LLC before EIN as you are not guaranteed your business name if it has not been registered. Also, the new regulation of the IRS requires filing the articles of incorporation and other documentation before businesses can obtain an EIN.Is an LLC the best choice? ›
An LLC's simple and adaptable business structure is perfect for many small businesses. While both corporations and LLCs offer their owners limited personal liability, owners of an LLC can also take advantage of LLC tax benefits, management flexibility and minimal recordkeeping and reporting requirements.
Only LLCs can choose corporate tax status
A key difference between LLCs vs. sole proprietorships is tax flexibility. Only LLC owners can choose how they want their business to be taxed. They can either stick with the default—pass-through taxation—or elect for the LLC to be taxed as an S-corporation or C-corporation.
If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice. You can negotiate such control in a partnership agreement as well. A corporation is constructed to have a board of directors that makes the major decisions that guide the company.Who is best to set up an LLC? ›
- No corporate or personal income taxes.
- No franchise taxes.
- Anonymity in public filings.
- No information-sharing agreements with the IRS.
- No requirements for operating agreement or annual meetings.
As an LLC owner, neither federal law nor state LLC statutes require you to have a separate business bank account. Still, there are several reasons accountants, lawyers, and some banks recommend you do.What is the difference between an EIN and a business tax ID? ›
Yes, there is a technical difference between an EIN and a tax ID number in the sense that a Tax ID number can be issued on the state or the federal level, but an EIN is strictly federal (also called an FEIN or Federal EIN).Do I need EIN for LLC bank account? ›
Details you'll need to apply online:
Business tax ID number: Business Employer Identification Number (EIN) provided by the IRS in the following 9-digit format XX-XXXXXXX, or, if the LLC is a single member LLC, the EIN of the company or the Social Security Number (SSN) of the single member.
How an LLC can benefit a small business. Probably the most obvious advantage to forming an LLC is protecting your personal assets by limiting the liability to the resources of the business itself. In most cases, the LLC will protect your personal assets from claims against the business, including lawsuits.What is better for taxes LLC or S Corp? ›
Taxes on S corporations are lower than on non-S corp. LLCs. As an LLC owner, you'll incur steep self employment taxes on all net earnings from your business, whereas an S corporation classification would allow you to only pay those taxes on the salary you take from your company.Is LLC good for startup? ›
The general consensus is that start-ups seeking venture capital should incorporate as C-Corporations, not LLCs. Interestingly, an LLC is a highly customizable entity through which a company could set up structures similar to a C-Corp.What is the best form of ownership for a business? ›
Once businesses reach any substantial size, it is advantageous to organize as a corporation so that its owners can limit their liability. Corporations, then, tend to be far larger, on average, than businesses using other forms of ownership.
As long as an LLC doesn't elect corporate taxation, it has the same exact tax structure as a sole-proprietorship. In other words, LLCs do not pay more taxes than Sole Proprietorships.Do you pay more taxes as a sole proprietor? ›
Sole proprietors must pay the entire amount themselves (although they can deduct half of the cost). The self-employment tax rate is 15.3%, which consists of 12.4% for Social Security up to an annual income ceiling (above which no tax applies) and 2.9% for Medicare with no income limit or ceiling.