Starting a new business is an exciting endeavor. To give your new company the best chance of succeeding, there are certain steps you’ll need to take during the formation process. You will need to choose a formal structure for your new entity — but which sort of structure will make it easier to achieve your long term goals?
You’ll also need to draft contracts and agreements for your operations, and any deals or transactions you make with other parties — but how do you know those contracts are valid, enforceable, and compliant with the law?
These are just a few of the many questions all startup owners must ask themselves as they go through the initial procedures for launching a company in California. An experienced attorney can help you find the answers. To arrange for a private legal consultation with a Beverly Hills, California small business startup attorney, call Manavi Law Group, APLC today at (310) 879-5616.
Which Business Structure Should You Choose?
For every new business, this is the first question to be answered. Just as a coffee shop is different from a sit-down restaurant, the type of formal structure you select for your business will impact virtually every aspect of your new organization throughout its entire life cycle, from daily operations, to financial liabilities, to how many people can be owners.
Which Structures Can I Choose From?
There are four basic types of structures you can choose from, some of which involve more specific sub-categories:
- Limited Liability Company (LLC)
- General Partnership (GP)
- Limited Partnership (LP)
- Limited Liability Partnership (LLP)
- Sole Proprietorship
How Do Different Structures Work?
- C-Corp — C-Corps are taxed twice, because both the corporation itself and the individual shareholders are subject to taxation. However, these organizations give owners personal liability protection, and can have an unlimited number of shareholders, which is optimal for very large-scale operations.
- S-Corp — Unlike C-Corps, S-Corps are not subject to corporate income tax because they are pass-through entities. While they must file an informational return, they do not actually pay income tax. S-Corps grant partial personal liability protection.
- GP— A general partnership divides responsibility and authority equally among partners. While the very word “partnership” implies two people, a general partnership can actually involve two or more people. GPs are subject to formal partnership agreements, but also have low startup costs.
- LLC — Historically speaking, the LLC is one of the newest business structures. Limited liability companies are often called “hybrids,” because they blend the simple tax considerations of a partnership with the liability protection of a corporation. This makes the LLC attractive to many startup owners.
- LLP — LLPs limit personal liability which arises out of another partner’s actions (e.g. malpractice). There must be a minimum of at least two partners. LLPs are somewhat restrictive in that they are only available to certain professionals, such as attorneys, accountants, physicians, and architects.
- LP — In a limited partnership, there is a general partner and a limited partner. The former has a greater degree of control, but also has more personal liability. The latter has less influence over the business, but also enjoys personal liability protection.
- Sole Proprietorship — As the term “sole” suggests, these businesses involve only one owner. However, it is possible to hire employees. If the proprietor dies, the business will dissolve.
Pros And Cons Of Different Business Structures
Needless to say, each structure comes with its own set of pros and cons. What may be a perfect fit for one company would be highly disadvantageous for another, so it’s critically important to go over the benefits and drawbacks in detail with an attorney. Here are some general points to consider:
- Personal Liability — Personal liability means that if your business runs into trouble — for example, if you are sued because somebody injures themselves at your store — your own personal assets become vulnerable, including your home and the contents of your bank account.
- Size — Some people form businesses on their own, while others enter an endeavor with dozens or even hundreds of other shareholders. Some structures provide more options than others, and depending on how many people are involved in your operation, your options may be limited.
- Taxation — No one wants to pay higher taxes than absolutely necessary, but the owners of structures are taxed more heavily than the owners of others. For example, some shareholders enjoy “pass-through” status and are only taxed once, whereas others are taxed at both the company and individual levels.
- If you are thinking about starting a new business, call the Beverly Hills, California small business startup firm of Manavi Law Group, APLC, or contact our law offices online to schedule a confidential consultation.