Some people are gifted with great business acumen and others “just fake it until they make it.” However, being an entrepreneur is not very forgiving. “Faking it” in any arena can get a business and its owners into hot water just by not knowing. One of the most important things a business owner should do is determine which type of business entity their business will be. Selecting the correct type of business entity formation is important because it will define the ownership structure and federal and state reporting obligations, along with taxation and overall liability issues. There are six different entity formation types in the State of California:
For individuals operating a business with full control of the operations. All profits and expenses from the business, including tax liabilities, are the sole responsibility of the individual. The State of California does not require any formation documents.
LLPs are formed by professional service businesses such as those practicing public accountancy or legal, architecture, or engineering firms, to name a few. An application to register the partnership (LLP-1) must be filed with the State of California. In addition, the LLP must purchase insurance coverage as determined by California law.
An LLC benefits from some of the same protections given to a business that is incorporated; however, the taxation structure is different. Articles of Organization (LLC-1) are filed with the State of California Secretary of State’s Office. An operating agreement between the members must be prepared and kept on file where the official records are kept for the LLC. An LLC may be managed by one or more members of the LLC or managers.
One general member of the partnership acts as the controlling partner while other limited members fill a limited role in the organization. Those members identified as general partners have unlimited personal responsibility as it pertains to the LP. A Certificate of Limited Partnership (LP-1) is filed with the California Secretary of State’s Office.
Two or more partners are equally responsible for the debts and obligations of the GP. Taxation of business profits are handled on personal tax returns for each partner. Registration of the GP is optional in California but if registration is desired, the Statement of Partnership Authority (GP-1) must be completed.
A corporation stands alone; legally separate from its owners. While the owners benefit from limited personal exposure and responsibility, taxes are the responsibility of both the corporation and its shareholders. Corporation affords the owners the most amount of protections from liability. Articles of Incorporation must be filed with the California Secretary of State’s office.
Each of these business entity types offers a wide variety of benefits and they should be reviewed carefully before proceeding. It is beneficial to speak with a tax professional, such as the experts at Whyte & Associates, or a lawyer to gather as much information as possible before proceeding with the application process.