A GUIDE TO OPENING A BUSINESS, Part 1
By Christopher A. Kerosky, Esq.
The following is a series of
articles on the process of starting and managing a business in California California
First Step: Choosing a Proper
Business Form and Registering Your Business.
One of the most important and
sometimes most difficult decisions is the proper legal form for your business.
There are four basic legal forms, each described below: the sole proprietorship, the partnership, the corporation and the
limited liability corporation (LLC).
Generally, the decision should be
made with reference to several factors: simplicity and cost of organization;
control and decision-making; taxes; and responsibility for the debts and other
potential liabilities of the business.
In another article, I deal in depth with the differences between each, but
I will describe the basic differences here.
A sole proprietorship has the advantage of simplicity, requiring less
registration and paperwork. Also, the
income of the business is treated as income of individual for tax purposes,
which makes tax return preparation a bit easier. However, there is no protection from personal
liability for the owner. The debts of
the business are treated as debts of individual, including liability due to
accident or injury.
A partnership also does not require formal registration or continuous
meetings and minutes, as with a corporation.
However, a written agreement between partners is strongly
advisable. Like a sole proprietorship,
the income of the partnership are not separately taxed. But, again, the partners are not shielded
from liability. There are now limited
liability partnerships (LLPs) which do provide limited protection for
liability, although not as complete as with a corporation or LLC.
Corporations
and Limited Liability Corporations are
very similar. Both require corporate
documents to be drawn up, usually by a lawyer.
Both require registration with the state described below.
With corporations, certain legal
documents must be kept on an ongoing basis, such as shareholders meeting
minutes, records of stock transactions. Formation of an S corporation requires
an additional filing with the IRS. With
LLCs, the ongoing paperwork is not as demanding.
With both LLCs and S corporations
(used by most small businesses), income is treated as the income of its shareholders just like a sole
proprietorship. With larger C
corporations, income of business is not treated as income of individual for the tax purposes.
Only dividends paid to shareholders [or salary paid to employees] is treated as
income. On the case of payment of dividends, this can subject the company to
double taxation under certain circumstances.
One of the principal advantages of
LLCs and S corporations is that the debts of the business are not treated as
the debts of individual partners. A corporation can go bankrupt even while its
shareholders remain solvent. Most
importantly, the shareholders are shielded from the liability of the
corporation as long as the corporate formalities are followed.
Once you have decided which
business form you will use, it may be necessary to register your business with
the state of California
The Secretary of State must approve
all names before they can be registered.
The main criteria that the Secretary of State’s office applies is that
they ensure that your proposed name is not already taken by another entity of
the same type. A business entity in California
California Secretary
of State Offices
Name check phone number is 916-653-6814
(916) 657-5448
Los Angeles Branch
300 S. Spring Street, Room 12513
(213) 897-3062
CHRISTOPHER A. KEROSKY of the law firm of KEROSKY PURVES & BOGUE has practiced law for over 25 years and has been recognized as one of the top lawyers in Northern California for 9 years by San Francisco Magazine “Super Lawyers” edition. He graduated from University of California, Berkeley Law School and was a former counsel for the U.S. Department of Justice in Washington D.C. His firm has offices in San Francisco, Los Angeles and 7 other locations in California.
WARNING: The foregoing is an article discussing legal issues. It is not intended to be a substitute for legal advice. We recommend that you get competent legal advice specific to your case.
