Entity Formation

When starting a business, you may choose from several business forms or organizations. A variety of organizational structures are available for transacting business in California. Choosing the proper business entity for your business is vital to the success of your project.

One of the primary considerations in selecting a business organization is protection of the owners of the business from liability. Other considerations include tax treatment by the federal and state governments, management structure, future ownership, and capitalization. California laws determine how particular entities should be set up and conduct their business. These laws are very specific and set out the legal responsibility of each business form. Taxing authorities and regulatory agencies also have laws that pertain to business. The most common business structures are described below:

  • General Partnership
  • Limited Liability Partnership
  • Limited Partnership
  • Limited Liability Limited Partnership
  • Limited Liability Company
  • Corporation
  • S Corporation

A very brief description/definition of the aforementioned entities is set forth below:

A general partnership is a partnership in which all partners participate fully in running the business and share equally in profits and losses. While forming a general partnership is easy (there are no filing fees or filing formalities), partners of a general partnership are typically jointly and severally liable for all debts and obligations of the general partnership.

A limited liability partnership is like a general partnership. The LLP allows all the partners to take an active role in the management of the business while offering members some liability protection from actions of the other partners and the partnership and the partnership employees. LLPs are most often used by groups of professionals such as doctors, accountants or architects.

Limited partnerships are partnerships comprised of one or more persons who control the business as general partner(s), and one or more persons (limited partners) who contribute capital and share profits but who do not manage the business and are liable only for their amount of their contribution to the limited partnership.

A limited liability limited partnership (LLLP) is a limited partnership which registers with the Secretary of State as an LLLP. One effect of registration is to limit the vicarious liability of the general partners in the same fashion that registration as an LLP limits the liability of the general partners of a general partnership.

A limited liability company is a statutorily created entity comprised of members with limited liability. Limited liability companies can be managed by either their members or managers.

A corporation is an entity that has the authority to act as a single person distinct from the shareholders that make up the corporation. Some of the advantages to operating a corporation include its limited liability for shareholders, centralization of management and status as a separate legal entity.

The S Corporation is a corporation that chooses to be taxed under Subchapter S of the Internal Revenue Tax Code. Being an S Corporation is a tax matter only. S Corporations are “tax pass through” business entities, meaning their profits and losses are reported by their owners on the owners’ personal tax returns.