At Gedeon Law & CPA, we regularly work with a lot of start up business that need help with deciding how to do business in California.
You can conduct business in California through a number of legal structures ranging from sole proprietorships to corporations.
In this article, we’ll provide basic information on the different legal forms available and the services we offer business clients. Our next article will discuss how to decide what business type is right for you and the tax savings that you can realize from setting up a business.
Sole proprietorship is the quickest and easiest form of operating a business. It is a one person owned business and the person operating the business is personally liable for any debts incurred. Any profit or losses from the business activities are reported on the individual’s personal tax return. While there will be no entity formation costs, there are federal and state requirements for tax and other matters depending on its activities (e.g. a license from the state or worker’s compensation).
Partnerships in California can either be performed at will if two or more persons are conducting a business together or by two or more persons formally entering into written partnership agreement. It is always recommended that partners enter into a written partnership agreement. The partnership agreement regulates the internal affairs of the partnership, including allocating the respective profits and losses and distributions to the partners. The partners in the partnership will normally be liable for any debts incurred by the partnership. At Gedeon Law & CPA, we advise our clients on preparing a partnership agreement that governs their partnership.
Establishing a corporation provides the owners with limited liability protection. Stockholders liability will ordinarily be limited to their contribution to the corporation. The tax affairs of the corporation are normally separate from the owners. At Gedeon Law & CPA, we form the corporation and prepare all of the constituent documents, including any stockholder agreements.
An “S” Corporation is a corporation except for the fact that it has made an election for Federal tax purposes to pass through its income and losses to its stockholders. It is taxed on a similar basis to a partnership and its shareholders avoid double taxation. Stockholders will report their own proportionate interests in such losses or gains on their own Federal tax returns. In order to gain “S” Corporation treatment the Corporation must meet certain requirements. At Gedeon Law & CPA, we can advise on those requirements and if it will be suitable for your purposes.
A limited partnership can be set up in California, where the persons or entities investing in the partnership are deemed limited partners. As limited partners, their liability for the debts of the limited partnership will be limited to their investment. Limited partners role in the limited partnership is purely passive, and they must not participate in the management of the limited partnership otherwise they will lose their protection as a limited partner and become generally liable for debts. Each limited partnership must have a general partner, which is ordinarily a corporation responsible for managing the affairs of the limited partnership.
The liability of the general partner for partnership debts is not limited. Limited Partnerships are often used for investment purposes, such as hedge funds or real estate investing.
LIMITED LIABILITY CORPORATION (LLC)
A Limited Liability Corporation (LLC) is a cross between a corporation and partnership, as the limitation on liability for investors is similar to a corporation, but it is managed in a similar manner to a partnership. The managing members participate in the management of the LLC in the same way that partners do in a partnership, there being no board of directors. The default tax treatment of a LLC is a partnership.
CALIFORNIA OR DELAWARE OR NEVADA?
A lot of businesses look to Delaware and Nevada as the state of choice when deciding where to establish their legal entity. There are a number of reasons for this including, flexibility in organizing the internal affairs of the entity and no state corporate income taxes. Unfortunately, if you are doing business in California, or any other state for that matter, and your entity is established in Delaware or Nevada, then you will still be required to register your entity with the Secretary of State in California or such other state. At Gedeon Law & CPA, we assist our clients with the formalities involved with registering to do business in the state. In addition, the entity will be subject to the local laws and taxes that apply in California or the state you are doing business in. We regularly work with our clients to advise them on the advantages and disadvantages of where to form their entity.
WHAT CAN GEDEON LAW & CPA DO FOR YOUR BUSINESS?
Starting a new business can create many legal and tax issues that can have significant consequences down the road.
When it comes to setting up a new business, at Gedeon Law & CPA we work with our clients to address the following matters:
- Advise on the most suitable and effective legal entity form for your business;
- Provide guidance on federal and state registrations;
- Prepare, review and negotiate your business terms to give you the best advantage;
- Draft and review contracts with third parties you are wishing to engage;
- Prepare and review investment, participation and stockholder agreements.
Contact us today and let our experienced business lawyers provide you with cost-effective representation through all aspects of the business entity formation process.