Company Formation: Understanding the different types of business structures

Choosing the right business structure is crucial for tax, liability, and management considerations. This overview covers corporations, LLCs, partnerships, and sole proprietorships, guiding you through each option’s basics.

By Brad Nakase, Attorney

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Table of Contents

1. What are the different types of businesses?

2. Corporation

3. Limited Liability Company (LLC)

4. Limited Partnership (LP)

5. General Partnership (GP)

6. Limited Liability Partnership (LLP)

7. Sole Proprietorship

What are the different types of businesses?

One of the first things to think about when starting a company is what kind of entity to create. When making your decision, take into account federal and state duties related to the form of business, director and ownership considerations, tax and liability difficulties, and more. The requirements of your specific kind of business, as well as the needs of your employees and yourself, should be taken into account.

A quick summary of the several types of company structures is provided here. This article is meant to give a fundamental overview of the various company formations. You should speak with a private attorney or tax expert before forming a business in California. They will advise on what kind of entity will best suit your purposes and your legal responsibilities.

Corporation

Generally speaking, a corporation in California is a separate legal entity from the owners. Both the corporation and the shareholders are subject to taxes, even though the owners are often shielded from personal culpability. The sale of bonds or stocks may raise additional funds, and the company may survive after the owners pass away. Be sure to consult an attorney about the various options available.

Articles of Incorporation have to be submitted to the California Secretary of State’s office in order to establish a corporation in that state. You can either create your own document in compliance with state regulations or use an online template.

Limited Liability Company (LLC)

Although it is taxed differently, an LLC in California often provides liability protection comparable to a corporation’s. There can be one or more members or managers in charge of managing domestic LLCs. It is necessary for the members to create an operating agreement concerning the LLC’s activities and business behavior. They also need to file the required paperwork with the Secretary of State. The operating agreement is held at the LLC’s record-keeping office instead of being filed with the Secretary of State.

Limited Partnership (LP)

Certain partners may have restricted liability under a California limited partnership. In most cases, a limited partner’s liability is restricted to the degree of control or participation they have. There has to be a minimum of one general partner acting as the controlling partner. An LP’s general partners are personally liable indefinitely for the obligations and debts of the LP.

General Partnership (GP)

Two or more people operating a profit-making business are required for a California general partnership. All partners are legally responsible for the partnership’s debts jointly and severally, unless otherwise specified by law. The partners’ personal income is taxed on the profits.

Limited Liability Partnership (LLP)

An LLC is a partnership that conducts business as a public accounting firm, a law practice, an architecture firm, an engineering firm, a land surveying firm, or it offers facilities and services to a foreign law firm, a California registered LLP, or both. As mandated by law, an LLP must keep specific insurance coverage levels.

Sole Proprietorship

A sole proprietorship is designed to enable an entrepreneur to be the owner and manager of a company. A lone proprietor is in complete control of the business, is liable for all liabilities and taxes, and receives all profits. In the event that a sole proprietorship is established under a name other than the individual’s name (for instance, Jane Doe’s Fishing Shop), the county where the primary business location is situated must receive a Fictitious Business Name Statement.

It is not necessary to file any paperwork with the Secretary of State’s office in California. However, consulting a business formation & incorporation lawyer can provide tailored advice for your situation. The nature of the business may dictate the need for additional state filings.

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