Starting a business does not happen overnight. It requires detailed planning and a lot of time and energy investment. Each entrepreneur who intends to start a business in California is forced to make a number of important decisions regarding the finances, employment, marketing and legal matters. Choosing the business entity type is one of the key decisions an entrepreneur faces at the start of every business. There are various factors affecting the choice of the entity type, such as taxation laws, ownership structure, liability protection, investment considerations, etc.
Business Entities to Consider
Here is a roundup of the three main business entities an entrepreneur can consider in California:
A Sole Proprietorship: This is the easiest and the most low-cost type of entity. It usually requires very little paperwork or legal documentation. The startup entrepreneur holds overall responsibility for the company without any formal partner. He/she has total control of profits and is responsible for taxes and liabilities of the business. A sole proprietorship gives the business owner an advantage to commingle his/her personal and business funds which is illegal for businesses with multiple owners. Yet, this also means that when the business is sued, the owner’s personal assets are at risk. Note that no any document formation is needed to establish a sole proprietorship. As you and your startup are considered as one in the same, there is no need to file separate business taxes.
A General Partnership: It is an entity structure in which two or more individuals or corporations are involved in a business activity. A partnership agreement is signed defining the rights, responsibilities, and duties of each partner of the general partnership. The financial responsibilities, the profits, and losses of the business are equally shared among the parties of the general partnership. It is also easy to establish with no need of format filling. What makes the entity type controversial is that each partner is liable for the actions of the others on behalf of the business. Thus, if the partnership is sued, each partner’s personal assets are potentially at risk.
Limited Liability Company: The most widely applied type of entity that provides flexibility in tax and management. An LLC can have one or more owners – referred to as members. The essence of LLC is that the members of the company cannot be held personally liable for the company’s debts or liabilities. This means that if your company gets sued, the personal assets of LLC members are protected. LLC offers a lot of tax flexibility, such as ‘’pass-through taxation’’. The other advantages of LLC entity include freedom in management, less administrative requirements, flexible profit distribution and some more. The cost to form a California LLC with the California Secretary of State is $70. There is an additional annual minimum tax of $800 that varies based on the income of the LLC.
Choosing the entity type that will fit your startup’s needs and have tax and liability advantages is not as easy as pie. As an entrepreneur, you hold the responsibility to opt for the entity type that will provide your startup’s further success. To fully understand the benefits and drawbacks of each entity you will certainly need to consult with an experienced business attorney. The knowledgeable business attorneys at the Margarian Law firm can help you select the entity type that best fits your startup and promote your business thriving in compliance with state and federal laws.