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California Business Forms and Structures: An Overview

If you are just starting your new San Diego business, California law provides you with many choices as to the form and corporate structure of your business. There are advantages and disadvantages for each form/structure, and a good corporate attorney can help you decide which form/structure is best for your business. Just as importantly, as your business grows, new and different forms/structures might be better. There are certain transition points in the natural growth of a business at which it may be time to consider converting. Again, a good corporate attorney can help. This article provides a quick primer and overview of the various business forms and structures available under California law.

San Diego Corporate Law: Sole Proprietorship

A sole proprietorship is the “default” setting for anyone running a business without some other form or structure. A sole proprietorship does not require any steps or formalities to create; you just start running your business under your own name, with your own tax identification number — your social security number — and with your own money and resources. You are responsible for any losses that the business might incur. Any leases or other contractual commitments are personal to the owner. Like all businesses, a sole proprietorship must comply with local, state and federal laws and regulations including such matters as permits, land use, zoning, etc. Probably the most complicated aspect of a sole proprietorship is having to fill out Schedule C on your personal income tax return. Schedule C requires the listing of revenue and allowable expenses.

In general, sole proprietorships do not have employees. Hiring your first employee is one of those natural growth points at which it is time to convert your business into a corporation or limited liability company. As the name implies, a sole proprietorship is for ONE person. Bringing on partners or expanding ownership is another natural growth point.

San Diego Corporate Law: General Partnerships (and Joint Ventures)

When two or more people are running a business, the “default” form of business is a general partnership. As with a sole proprietorship, no formal structure or action is needed; that is, no paperwork need be filed with the California Secretary of State or any other state division/department. By working with someone else to run a business and divide profits/losses, you and your partner are engaged in a partnership under California law. As with sole proprietorships, the partners use their own money and assets to run the business, contracts are made with the partners personally, and the partners are personally responsible for debts and obligations. Indeed, one of the partners may be held wholly liable for the debts and obligations. That is one of the major disadvantages of general partnerships.

A joint venture is, in general, a form of general partnership. However, a joint venture tends to be made between business entities (as opposed to a partnership between natural persons). A joint venture also tends to be limited to a specific project or resource/market exploitation (e.g., construction project, mine, oil well, etc.).

Other allowable partnership structures in California include limited partnerships and limited liability partnerships.

San Diego Corporate Law: Corporations

Corporations are the most common form of business structure. A corporation is a formal legal entity that must be authorized by the California Secretary of State. Articles of incorporation must be filed and approved; there are annual filing requirements and corporate tax returns that must be filed. When articles of incorporation are issued, a new legal entity comes into existence separate and apart from the natural persons who own the corporation. The corporation may take various legal actions such as signing a contract and filing a lawsuit. Those actions are taken by the corporation, and not the individuals who own corporation (even though those individuals may have directed the corporation to so act). Corporations receive their own tax identification numbers, file separate tax returns, etc. Corporations are very flexible and can be small to enormous in size.

The main advantage of corporations is shielding personal assets from being seized by creditors if the corporation defaults on debts and obligations. If the business is a retail store, for example, and there is a slip and fall accident after which the victim sues and wins a $1 million judgment, a sole proprietor is paying that judgment from his or her personal assets. By contrast, a corporation is paying that judgment from corporate assets.

Corporations are managed by a board of directors and there are many requirements for maintaining a corporation such as shareholder meetings, director meetings, minutes, etc.

San Diego Corporate Law: Limited Liability Companies

Limited liability companies (“LLC”) are a newer form of business entity. Like corporations, LLCs shield personal assets in most circumstances and are formally created by filing articles of organization with the California Secretary of State. Unlike a corporation, an LLC is managed by its members and managers (so no board of directors) and the formalities are substantially less. An LLC is an excellent business form/structure for a new business, but there are inherent limits to how many members/owners an LLC can have. As such, a business may outgrow its LLC form.

San Diego Corporate Law: Professional and Healing Arts Corporations

Another type of corporation allowed is California is a professional corporation. See Cal. Corp. Code, §§ 13400 et seq. These types of corporations are “normal” corporations in terms of creation and legal existence, but may only be formed and owned by the respective licensed professionals. Thus, a dentistry professional corporation may only be formed and owned by licensed dentists and other professionals in allied fields.

Contact San Diego Corporate Law Today

If you would like more information on business forms and structures, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can provide advice and counsel on what form is best suited to the needs of your business. Mr. Leonard has been named a “Rising Star” for four years running by SuperLawyers.com. Mr. Leonard can be reached at (858) 483-9200 or via email.