Choosing the legal structure that best suits your business type is a top priority. This important decision impacts your business registration, how much you pay in taxes, and your personal liability (i.e. who is legally responsible for debts). The most common structures include: sole proprietorship, partnership, limited liability company (LLC), and corporation. This choice must be made prior to registering your business and, in some cases, even before choosing a name.
This is not a substitute for legal or professional advice.
Types of Business Structure
Be sure to carefully compare the different types of structure before making your decision as there are advantages and disadvantages to each type, depending on your situation. The Business Entity Comparison Table can show you a simple comparison, or you can find more detailed information from the US Small Business Administration (SBA). You should also consider consulting an attorney for legal and tax advice.
Once you choose our business structure, you may register your business with the City. However, if you chose a partnership, corporation, or limited liability company (LLC) as your business structure you must register or incorporate with the CA Secretary of State first.
Legal business entities (Partnerships, Corporations and LLC's) are required to pay an annual minimum tax of $800 to the California Franchise Tax Board no matter how much income they bring in.
- Sole Proprietorship
- General Partnership
- Limited Partnership (LP) and Limited Liability Partnership (LLP)
- Limited Liability Company (LLC)
A sole proprietorship is the most basic type of business to establish. You alone own the company and are responsible for its assets and liabilities.
In a general partnership, two or more people share ownership of a single business. The partners manage the business and are responsible for all debts and obligations of the business. The details of this agreement should be written out formally to define the roles of each partner, including what would happen if the business fails.
Limited Partnership (LP) and Limited Liability Partnership (LLP)
Limited Partnerships have both limited and general partners. The general partners own and operate the business, while the limited partners invest in the business but have limited liability and thus limited input in its management. Limited liability partnerships are similar to an LP, but in an LLP even the general partners have limited liability – eg. they are not responsible for the malpractice of the other partners.These business types are not usually used for retail or service businesses.
Limited Liability Company (LLC)
An LLC is a hybrid between a corporation and a partnership. Similar to a C-Corporation, business owners in an LLC are not responsible for the debt of the company – in other words, they have limited liability. However, unlike a corporation, the business does not file separate taxes. Instead, each partner (called members) includes their profits on their personal tax return.
A C-Corporation (C-Corp) is more complex than other business types and is generally suggested for larger, established companies with multiple employees. It is a separate entity from those who own it, meaning it can be taxed (or sued) independently from its owners. In a C-Corp, the owners are called shareholders. They elect a board of directors to oversee major policies and decisions, and appoint officers who carry out the daily operations of the business.
An S-Corporation (S-Corp) is similar to a C-Corporation except that the business is not taxed separately from the owners. S-Corps are also very similar to Limited Liability Companies (LLC’s) but with more limitations. The owners, called shareholders, avoid the double taxation of a C-Corp but the business is limited to 100 shareholders and has only one class of stock.
A B-Corporation (Benefit Corporation or B-Corp) is a new business form in the United States that both generates money for its shareholders and benefits society. Directors are required to consider the effect of decisions on shareholders as well as workers, the community, and the environment. Shareholders in a benefit corporation determine if the company has achieved a material positive impact, which the organization defines beforehand.
B-Corps can also become Certified B Corporations if they meet the requirements of the nonprofit organization B Lab.
Last modified date: Thu, 06/18/2015 - 14:53