Business startups are not for the faint of heart. Someone long ago and far away shared some advice when I joined the ranks of the self employed. He said, “don’t think of it as being self employed, it’s more like being self inflicted!” Joking aside, despite the challenges, I wouldn’t have it any other way.
Many entrepreneurs have a desire to begin a business but are unsure about the steps to take to get started with their enterprise. Robert Sanders, a business attorney in California shared his perspective on the importance of selecting the right business structure. Which structure you choose can effect taxes, liability, the operation of retirement plans, and health benefits. Here is a list of the four most common business structures used in California:
By default, when an individual goes into business in California without a formal company, the law deems them to be a sole proprietor. These individuals often provide services or sell goods on a small scale and report their earnings on their personal tax return. There is no liability protection from third parties afforded to sole proprietors. The major advantage to using a sole proprietorship is that it is extremely simple; beyond a business license, there is not much else required of a business owner to run the company.
Akin to a sole proprietorship, a general partnership is the default business structure when two or more people start a business enterprise with the purpose of making a profit. There are some significant legal drawbacks to partnerships, among which is the fact that all partners are liable for all of the business dealings of any of their partners. A formal partnership agreement is recommended whenever a partnership is used.
Limited Liability Company:
LLCs provide the most degree of flexibility in structuring a company. Members are the owners of the LLC. Managers are those individuals who carry out the day-to-day business of the LLC. Having a carefully-drafted Operating Agreement in compliance with California law is vital to the proper functioning of the LLC. A significant advantage of employing an LLC structure is that provided certain conditions are met, the company can serve as a legal shield against the owners from third-party claims.
The corporation (whether an “S-Corp” or a “C-Corp”) is the best established business structure in California. Shareholders own the company. The shareholders appoint a board of directors to make high-level decisions for the business. The board of directors, in turn, hire officers, including a President, CFO, and a Secretary at a minimum. The corporation also provides legal separation from the shareholders and the corporation’s debts and liabilities. There may also be some significant tax savings by using a corporate form.
Please remember this summary is not legal advice. Make sure to consult an attorney for guidance on your specific circumstances. For more business law information, visit the Robert Sanders, Attorney at Law’s website, call him at 916.235.6840 or connect with Robert Sanders on LinkedIn.
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