Step 3 - Choose a business structure

Step 3
Select a business entity type from the following list for a brief overview of the principal types of legal business structures available in California. A legal representative and accountant should be consulted before making a determination as to the type of business entity to form.

Starting a Business in California http://www.sos.ca.gov/business/filings.htm

Once you decide to establish a business, a primary consideration is the type of business entity to form. Tax and liability issues, director and ownership concerns, as well as state and federal obligations pertaining to the type of entity should be considered when making your determination. Personal needs and the needs of your particular type of business should also be considered.

The following is a brief overview of various business structures. The information is intended to provide a basic understanding of the different business structures and is not intended to provide legal advice. It is strongly recommended you consult with a legal representative and accountant before making a determination as to the type of business entity to form:

1. Sole Proprietorship
2. Corporation
3. Limited Liability Company
4. Limited Partnership
5. General Partnership
6. Limited Liability Partnership

Sole Proprietorship
A sole proprietorship is set up to allow an individual to own and operate a business by him/herself. A sole proprietor has total control, receives all profits from and is responsible for taxes and liabilities of the business . If a sole proprietorship is formed with a name other than the individual's name (example: John Smiths Fishing Shop), a Fictitious Business Name Statement must be filed with the county where the principal place of business is located. To determine the applicable county agency where fictitious business names are filed, please refer to the list of California counties provided on the California State Association of Counties website. No formation documents are required to be filed with the Secretary of State. Other state filings may be required depending on the type of business.


Corporation
A domestic corporation (Articles of Incorporation) generally is a legal entity, which exists separately from its owners. While normally limiting the owners from personal liability, taxes are levied on the corporation as well as on the shareholders. The sale of stocks or bonds can generate additional capital and the longevity of the corporation can continue past the death of the owners. Legal Counsel should be consulted regarding the variety of options available for formulation.

Limited Liability Company
A domestic limited liability company (Domestic - LLC-1/Foreign - LLC-5) generally offers liability protection similar to that of a corporation but is taxed differently. Domestic limited liability companies may be managed by one or more managers or one or more members. In addition to filing the applicable documents with the Secretary of State, an operating agreement among the members as to the affairs of the limited liability company and the conduct of its business is required. The limited liability company does not file the operating agreement with the Secretary of State but maintains it at the office where the limited liability company's records are kept. Professional limited liability companies are restricted in California at this time.

Limited Partnership
A domestic limited partnership (Certificate of Partnership - LP-1) may provide limited liability for some partners. There must be at least one general partner that acts as the controlling partner while the liability of limited partners is normally limited to the amount of control or participation they have engaged in. General partners of a limited partnership have unlimited personal liability for the partnership's debts and obligation.
General Partnership

A general partnership (Statement of Partnership Authority - GP-1) must have two or more persons engaged in a business for profit. Except as otherwise provided by law, all partners are liable jointly and severally for all obligations of the partnership unless agreed by the claimant. Profits are taxed as personal income for the partners. Filing at the state level is optional.
Limited Liability Partnership

A limited liability partnership (Registration of Limited Liability Partnership - LLP-1) is a partnership that engages in the practice of public accountancy, the practice of law or the practice of architecture, or services related to accountancy or law. A limited liability partnership is required to maintain certain levels of insurance as required by law.