If you are thinking of starting a business, there are many aspects to consider. The first step is choosing the right business structure. In order to make that decision, there are a few factors to think about including (1) ease and cost of formation; (2) complexity of management; (3) transferability and dissolution; (4) liability protection; and (5) reporting requirements and taxation.
There are four main types of legal business structures:
1. Sole Proprietor
You are your business. This structure is for individuals and is sufficient if you have low risk in your business, such as, if you have no assets, and your business is unlikely to be a source of liability. Sole proprietors are personally liable since you are essentially your business.
2. Partnerships
This structure is when your business has more than one individual and you are planning to go into business with another person. The two or more individuals may form a partnership, either by an agreement such as a partnership agreement, or by forming a Limited Partnership which is registered with the secretary of state, or a Limited Liability Partnership for those who have professional licenses. The partnership will have more structure as the anticipated relationship, expectations and financial commitment will be documented and agreed upon by the Partners.
3. Limited Liability Company (LLC)
Article of Organization is filed with the secretary of state and the individual(s) are considered members of the LLC. There will be an operating agreement which details the transfer provisions of the membership interests of each member and may also contain provisions on voting and management. Members are not personally liable for the LLC’s actions unless there is a piercing of the corporate veil.
4. Corporation
Article of Incorporation is filed with the secretary of state and the individual(s) are considered shareholders of the corporation. Bylaws will be agreed upon by the shareholders which also details the shareholder’s contribution, voting rights and overall structure of the corporation. Shareholders are not personally liable for the actions of the corporation unless there is a piercing of the corporate veil. The corporation is formed as a C-Corp and may file an S-Corp election if the shareholders are all U.S. Citizens or Permanent Residents. The benefit of an S-Corp is that there is no double taxation.
In addition to the overall structure of the business, another area of consideration is the state of incorporation. Some bigger corporations or those who intend to go IPO may look into incorporating in the state of Delaware as there are some benefits since some of the corporate laws in Delaware may favor shareholders and management. Another possible state is Nevada as there may potentially be some tax savings since there may not be taxes on the state level. However, the business should still consult with an attorney on this issue because if there is any “presence” in the state of California, there may be additional registration and costs associated even if the company is incorporated in the state of Nevada.
Whether you are just starting your business or have an existing business that may be maturing or expanding, it is always a good idea to secure an experienced corporate attorney to help analyze your business structure to help determine what is best for your business and to help protect against any personal liability. Amity Law Group, LLP specializes in business law and offers services in English, Chinese, and Vietnamese in all areas of Southern California, including Alhambra, City of Industry, Diamond Bar, Los Angeles, Monterey Park, Pasadena, Rosemead, San Gabriel, Long Beach, Orange County, Huntington Beach, Westminster, Garden Grove, Santa Ana, Fullerton, Costa Mesa, and beyond.
