There are a variety of laws you have to follow if you are a small business owner or entrepreneur. One of the first considerations is the type of structure you wish to operate with.
The Salaami Firm enjoys working with passionate small business owners who provide great products and services to consumers. We help small business owners with business formation, trademarks, copyrights, contracts, employment agreements, and more. The Salaami Firm currently acts as inhouse counsel to several businesses in San Diego.
If you need legal help with legal issues from the perspective of a firm that has litigated business issues, formed, built, and operated businesses, and understands the importance of preparation and diligence prior to a problem arising, then contact us.
Just like a house or other building, a business needs a solid foundation to build upon. That foundation for your business begins with a solid legal structure (foundation) that you can build/grow, strengthen, protect, and grow your business on. Here in California, you have a few options… we only describe a few of the more common entities below:
A sole proprietorship is the simplest and most common structure chosen to start a business. A single individual owns and operates the business. The sole proprietor (owner) has total control, receives all profits from and is responsible for taxes and liabilities of the business. No formation documents are filed with the California Secretary of State. If the sole proprietorship uses any name other than the owner’s name then a fictitious business name filing must be completed in the county or counties where the business operates.
General Partnership (GP)
A California GP must have two or more persons engaged in a business for profit. All partners are usually liable jointly and severally for all obligations of the partnership. Profits are taxed as personal income for the partners. Registering with the California Secretary of State is optional.
A California corporation generally is a legal entity which exists separately from its owners. The owners (shareholders) are normally protected from personal liability if corporate formalities are followed. Taxes are levied at the corporate tax level and on individual shareholders for the income or dividends they receive. The corporation can continue past the death of the owners. A corporation must be registered with the California Secretary of State.
Limited Liability Company (LLC)
A California LLC generally offers liability protection similar to that of a corporation but is taxed differently. Domestic LLCs may be managed by one or more managers or one or more members. The limited liability company must be registered with the California Secretary of State.
BUSINESS FORMATION SUMMARY
|Sole Proprietorship||General Partnership (GP)||Corporation (Inc)||Limited Liability Company (LLC)|
|Description||Single business owner operates and controls business under his/her own name||Two or more individuals engaged in a business for profit||Business structure that passes all income, losses, etc. to shareholders (business operated by officers who are elected by shareholders)||Flexible business structure owned by a member or members with the tax advantages of a partnership but protection similar to a corporation|
|Owner||Single (Sole business owner)||Two or more individuals||Shareholder(s)||Member(s)|
|Taxes||Individual||Pass-through (individual)||Corporate tax level and shareholder level (“S” election allows for pass-through)||Can elect to be taxed as a corporation, including “S” selection; default is pass-through like partnership|
|Formalities||No||No||Yes||Yes (but usually less than a corporation)|
Hire Attorney for Formation?
Filing the initial paperwork and paying the filing fee to incorporate or register your business with the California Secretary of State is generally a simple process. There are even some businesses or individuals that will promise to do things for you for a very modest fee. If you choose to go that route, you may be okay, but then again, you may do something wrong which would could end up costing you more in the long run.
We always recommend that you have an attorney draft and/or review your actual bylaws, operating agreements, partnership agreements, shareholder agreements, etc. Why? It’s simple. If you do something right the first time, it can prevent a lot of headache and trouble in the long run.
We speak from experience. We have drafted agreements and started businesses. We have litigated over business agreements. We have ended businesses. With our insight, background, and experience, we may simple see things that you have not considered when you (and perhaps your business partners and/or investors) did not see. These oversights depend on your situation and type of business and can be very costly down the road when you are in a dispute with a partner, shareholder, customer, vendor, or other entity.
At minimum, contact us for a free consultation so we can help you explore your options and potential areas of concern.