Daniel J. Wright
General Legal Terms for Business Formation
If you are just starting out in business and are trying to decide what type of business formation would best suit your needs, a business attorney can go over all of your different options and offer guidance on the pros and cons of each. In the meantime, the following is a brief overview of your options. In the event that you have any more questions regarding business formation, do not hesitate to contact an attorney, like a business formation lawyer Roseville CA turns to, or locals to assist you.
Sole Proprietorship: A sole proprietorship is the least expensive – and often the simplest – type of business formation to choose from. You are the only owner in this type of business structure. You are not required to file any incorporation documents. You have the choice of doing business under your own name or you can choose to do business as a “doing business as” (which is also referred to as a D.B.A) and choose a business name. Whatever type of name you decide on, the proprietor and the business are considered one entity under the law. You may need to apply for a municipal or state business license, however, depending on where you live. The drawback to a sole proprietorship is that your personal assets have no protection from creditors or lawsuits that are connected to the business.
Partnership: Just like a sole proprietorship, there are no incorporation documents to file with the state. You will need to draw up a partnership agreement which specifies how the partnership will work and how profits and losses will be divided. One drawback to a partnership is that the law holds unlimited liability for the actions of one business partner on the other. This includes business debts and lawsuits. So if you run into issues and your partner is doing things you are unaware of, you will still be liable for his or her actions or agreements.
Limited Liability Company (LLC): Another option for a small business formation is filing articles of organization with the state to form a limited liability company. These types of business structures provide business owners with some liability protection. For example, any bank accounts or debts incurred by the business are in the LLC’s name, not the individual owner. When a company does form an LLC, the owner or owners do have to decide how they prefer the business to be taxed, either as a partnership or as a corporation. Your business attorney can help you decide which choice is the more appropriate one for your business.
Corporation: Forming a corporation is more complicated – and more expensive – than any of the other business structures. The first step is filing Articles of Incorporation with the state. There are two different types of corporations you can form. Both provide limited liability protection for all owners of the company. The first is a C corporation. With this type, process and losses are kept at the corporate level but are doubly taxed. Not only are earnings taxed, but the corporate dividends enjoyed by shareholders are also taxed. The second type is an S corporation. All profits and losses for the company go to the owners.
Both types of corporations have stringent federal and state rules they must abide by. They are required to file annual reports with the state they are incorporated in, hold annual meetings, and abide by all state and federal record-keeping regulations.
Thank you to the Yee Law Group for providing their legal insight on business formation.