Business & Civil Litigation
How to Form an LLC, LLP or Corporation in Orange, California
When forming a small business, one of the first legal decisions you need to make is which entity to choose. The attorneys at Cottle Keen Lopiccolo & Heyde can explain your options and help you make the right choice.
Common Business Entities
You must first determine the type of business entity you want to create. There are five main types of business formations, each with its own advantages and disadvantages. Some are easy and inexpensive to create while others offer limited liability protection against creditors or lawsuits stemming from your business operations.
If you are an individual wishing to start a small business, you may consider forming a sole proprietorship. This is one of the least expensive and easiest forms of business to create and requires no legal formalities except for appropriate licensing to conduct the business and registration of the business name with the state.
Unlike other business entities, you create a sole proprietorship simply by going into business as yourself. Legally, the sole proprietorship is inseparable from you, the owner. This means that you must report your business income and losses on Schedule C of your personal income tax.
Unlike other business forms, your personal assets have no protection from lawsuits or creditor claims. Thus, you are held personally responsible for your business debts and liabilities.
A general partnership is owned by two or more people who share the management, profits, debts and liabilities of the business. A partnership is similar to a sole proprietorship in that:
- No documents are filed with your state
- Business begins as soon as you start the business with at least one other person
- You and your partners must report your shares of the business income and losses on each of your personal tax returns
- Each partner is held personally responsible for all of the business’s liabilities.
Each partner has the authority to bind the partnership to any contract or business transaction.
If your risk of exposure to liability is low, then forming a sole proprietorship or partnership may be right for you.
A limited partnership is similar to a general partnership but there are two classes of partners: general and limited partners.
General partners are the business management. They:
- Control the partnership’s daily operations, decisions, and management
- Are personally responsible for the partnership’s debts, claims and lawsuits (unless the general partner is a corporation or limited liability company)
- Receive fewer profit shares
Limited partners are the investors. They:
- Invest money into the partnership
- Receive a predetermined share of the profits, usually more than each general partners’ share
- Have priority over the general partner regarding profit, tax deductions and potential share in success of the enterprise
- Have little control over the daily decisions, operations and management of the partnership
- Are not personally liable for business debts or claims
Limited partnerships are slightly more complex to form. They must:
- File the business name and the general partners’ names and addresses with the Secretary of the State or other designated officer in the state in which the partnership is created
- Have a written agreement between the general and the limited partners
The most complex and costly of all the business forms, a corporation is an independent legal entity, separate from the people who own, control and manage it. It is a legally fictional “person” approved by the state that can:
- Sue or be sued
- Enter into contracts
- Incur debts and liabilities, thus limiting the personal liability of its owners
- Pay taxes apart from its owners
- Issue stocks to raise funds
To form and maintain a corporation, you must:
- File “articles of incorporation” with the state
- Create a business name meeting the state’s requirements (e.g., it cannot be misleading or the same as another business)
- Depending on the state, list the registered agent and names of the corporate directors
- Create “corporate bylaws” (may not need to be filed with the state), which set rules that govern the ongoing formalities of corporate life, such as: When to hold regular and special meetings of directors or shareholdersNumber of votes necessary to approve corporate decisions
- File annual reports
- Conduct annual meetings
- Meet federal and state record-keeping obligations
- Issue stock certificates to the initial owners (shareholders) and record who owns the business.
There are two types of corporations: C and S. C corporations report their profits and losses and pay taxes at the corporate level. Owners that work for the corporation, and are thus employees of the corporation receiving a salary and bonus like other employees, are taxed on their earnings. Shareholders are taxed individually on the corporate dividends they receive.
With S corporations, profits and losses flow through the business to its owners. Thus, S corporation pays taxes like a partnership or sole proprietor by reporting the share of business income on the owners’ personal income tax returns.
Limited Liability Company
A limited liability company (LLC) is a business structure that combines the limited liability protections of a corporation and the “pass-through” taxation of a partnership. The owners, called members, are protected from personal liability for the business debts and claims. Thus, only the LLC’s assets are at risk rather than the members’ personal assets.
You may elect for your LLC to be taxed as a partnership or corporation. If taxed as a partnership (most common option), then each member files their share of the business income on his or her personal tax return. If taxed as a corporation, the LLC must file either a C or S corporation tax return.
Each state has certain laws regarding LLC formation. In California, an LLC must:
- File “articles of organization” (also known as “certificate of organization” or “certificate of formation,” depending on the state) with the Secretary of the State or other designated officer
- Create a business name meeting the state’s requirements (for example, cannot be the same as other business or misleading, and must end with “Limited Liability Company,” “LLC” or “L.L.C.”)
- Appoint a registered agent who can accept service of process in the state
- This person must be affiliated with the LLC, reside in California and his or her street address must be listed in the articles of organization
- File a Statement of Information within 90 days after the filing of the articles of organization and subsequently every two years
You should create a written operating agreement, even if the state, like California, does not require you to file the agreement. The agreement sets out the LLC members’ rights and responsibilities, percentage interests in the business, and their share of profits.
Small businesses are attracted to LLCs or corporations despite the complex paperwork because of the liability protections and potential business growth.
Common Business Start Up Pitfalls
Avoid these five common mistakes:
- Choosing the wrong business entity. There are several aspects of your business you should consider when forming a business, such as what your type of business, the level of risk for and/or exposure to liabilities, tax incentives, and potential growth.
- No written agreements. Written agreements should specify each owner’s roles, responsibilities, the share of profits, etc. Legally binding business contracts with clients are also important to help safeguard your company and reduce ambiguity.
- No business plan. A well-done business plan outlines everything from your business’s goals and objectives to financing and target markets. You can also use your business plans to help garner investors.
- Mixing assets. Even if the business entity offers limited liability protection, you lose that protection if you mix your personal and business assets, thus exposing you personally to business debts and liabilities. Keep separate business and personal bank accounts and don’t use your business income for personal reasons.
- Not protecting your intellectual property. Protect your ideas, the foundation of your business, by filing patents or registering trademarks.
Contact a California Business Transaction Attorney
Forming your business is a crucial decision. Our seasoned California business transaction lawyers will, among other important steps:
- Detail your options and the legal requirements to form and maintain your business
- Prepare and file all required business forms with the state
- Draft contracts associated with your business including partnership agreements, operating agreement, bylaws, employment agreements, and more.
- Review or draft lease agreements for commercial space
- Apply for any licenses or permits required for your business
- Apply for an employer identification number (EIN) needed for employee tax purposes
Consult our experienced California business transaction attorneys with Cottle Keen Lopiccolo & Heyde, LLP at (714) 997-7870 for your business-related needs.
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When it comes to your children, other loved ones and your finances, you want an attorney who knows the ins and outs of the law. Cottle Keen Lopiccolo & Heyde, LLP has attorneys on staff who are experienced in these areas of the law. Contact them by phone at (714) 997-7870 to set up a consultation. Find a family lawyer you can trust to handle your most fragile situation.