Los Angeles Business Start-Up Lawyer

Major Types Of Business Formations In California

If you’re in the process of launching a new business in California, you may be wondering about the most suitable company structure for your venture. Selecting the right entity form will streamline your business operations, foster growth, and enhance its overall success.

The choice of formation can also boost your company’s appeal to clients, suppliers, investors, lenders, and potential strategic partners. When establishing a startup in California, you have various entity options available, including the following:

Sole Proprietorship

A sole proprietorship is a type of business structure where you are the sole owner and operator. As the proprietor, you receive 100% of the profits and have complete control over the company. However, it’s important to note that sole proprietorships also come with certain disadvantages. Since there is no legal distinction between the proprietor and the business, the proprietor is personally responsible for all debts, obligations, and liabilities incurred by the company.

General Partnership

A general partnership (GP) is a business entity formed by two or more individuals who join forces to operate a commercial venture together. While it is highly recommended to have a written partnership agreement in place, it is possible to establish a GP without one. Similar to sole proprietorships, the profits and losses in GPs are distributed directly to the partners in proportion to their ownership share.

The allocation of partnership profits and losses is reported by individual members on their respective tax returns. It’s important to note that all members of a GP have unlimited personal liability. If business creditors seek to claim assets from the partners, they can pursue each partner individually, making each partner responsible for the actions or performance of any other partner.

Limited Partnership

A California limited partnership (LP) is a business structure where both general and limited partners are involved. In an LP, general partners have control over the management of the firm, receive a proportionate share of profits and losses, and assume individual responsibility for all partnership debts and obligations.

Limited partners in this business structure have limited or no control over the LP’s management, and their liability is restricted to the amount they invest in the partnership. It is important for limited partners to exercise caution and avoid commingling personal and partnership assets.

Limited Liability Partnership

A limited liability partnership (LLP) is a unique business entity available exclusively to licensed professionals such as accountants, lawyers, and engineers in California. It offers individual partners protection from personal liability for corporate debts, partnership obligations, and negligence of other partners. Unlike general partnerships, LLPs do not have general partners.

In an LLP, profits and losses are distributed to partners in proportion to their ownership share. Partners are responsible for reporting and paying taxes on their share of the LLP’s income on their personal tax returns. 

While LLPs are subject to the state’s minimum yearly franchise tax, they can avoid federal business income tax by meeting specific criteria that exempt them from corporate taxation. Unlike limited partners in a limited partnership (LP), LLP members have the authority to manage the company. LLPs must register with the state and comply with various requirements.

Limited Liability Company

A limited liability company (LLC) is a business structure that offers owners protection from personal liability for the company’s debts. It provides members with the flexibility to allocate profits and losses and shields their personal assets from lawsuits against the company. In California, LLCs are member-controlled entities, allowing members to directly manage the business or delegate management to designated managers.

Additionally, LLCs in California have the option to choose their tax classification as a sole proprietorship, partnership, C corporation, or S corporation. It’s important to note that California LLCs are required to pay a minimum annual franchise tax as mandated by the state.

S Corporation

An S Corporation is a unique type of corporation that allows business owners to treat the company as a pass-through entity, exempting it from corporate income taxes. However, if an S Corporation faces a lawsuit, shareholders are shielded from personal liability.

Owners of an S Corporation who also provide services for the company are considered both workers and business owners. They must receive fair compensation that aligns with the wages of similar workers in their industry. These owners report their salaries as regular W-2 employee paychecks, in addition to receiving a share of the profits, which are taxed at their personal tax rate. Dividing income in this manner can sometimes result in savings on self-employment taxes for company owners.

C Corporation

Incorporated businesses are the most common and well-known types of business entities. These conventional firms are owned by shareholders, who are protected from financial losses and obligations of the company.

In California, C corporations are managed by a board of directors, who hire corporate executives to lead the operations. Owners of C corporations can benefit from business tax deductions for expenses such as equipment, insurance, and employee costs. To raise funds for growth or debt repayment, C corporations have the option to issue ownership units through a public stock offering.

In order to operate, C corporations must file formal articles of incorporation with the government and provide important commercial information. The profits of a C corporation are usually taxed separately under the company’s name. 

However, the concept of double taxation is a significant disadvantage of forming a C corporation. This means that the profits earned by the business are taxed twice: first as company earnings and then as stockholder dividends.

Analyzing And Structuring Merger, Acquisition & Buyout Opportunities

When considering a merger or acquisition with another firm, it may become necessary to assess potential legal challenges and concerns if another organization expresses interest in acquiring your company at some point along its journey.Buy-sell agreements

The sale of a company’s business, stock, or assets can be complex and time-consuming under applicable laws. At EJP Law, our Los Angeles business start-up attorney can provide your firm with the necessary legal guidance to navigate these critical transitions in your business journey successfully.

We are here to ensure that any corporate transaction proceeds as smoothly as possible while safeguarding your company’s interests. Our expertise extends to various legal matters related to mergers and acquisitions, including:

• Equity purchase letters of intent
• Equity purchase agreements
• Pledge agreements
• Redemption agreements
• Asset purchase agreements

Contact Our Los Angeles Business Start-Up Attorney Today

Our business start-up attorney in Los Angeles possesses the expertise and experience necessary to guide you in making optimal decisions for yourself and your business. We deliver responsive and qualified professional legal services to California business owners who require assistance in future planning.

Reach out to EJP Law today for a complimentary consultation to discuss your unique circumstances with our skilled business start-up attorney based in Los Angeles. We will provide you with comprehensive information about your options and support you in making the most advantageous choices for your business.