Overview
The Law Office of Howard L. Hibbard has been assisting businesspeople set up corporations, establish limited liability companies and create partnership agreements for over 30 years. Our attorneys are knowledgeable about the benefits and liabilities of each type of entity and will review each client’s business requirements to determine the best type of business entity for the business. Our office also assists businesspeople with assessment and preparation of other business-related issues including: employment issues and drafting contracts to protect business and promote growth. Please contact us for a free consultation.
General Information about Business Formations
Formation of the appropriate business entity is a threshold issue to a successful business plan. Depending on the type of business, the capitalization of the business and the business plan, various business entities are available, including but not limited to:
(1) Sole Proprietorship;
(2) Partnership – General or Limited;
3) Corporation – General or Close, Chapter C or Chapter S; or
(4) Limited Liability Company (LLC).
The personal risks and liabilities of the business owner vary depending on the type of entity selected. To arrange a free consultation with one of our attorneys to discuss your business options please, contact us.
The California Franchise Tax Board provides tax filing and withholding requirements for sole proprietorships, partnerships, S corporations, C corporations, LLCs, and other business entities.
Types of Business Entities
As outlined above, business owners have a range of options when selecting the entity for their business. The following summaries provide a brief synopsis of each main category outlined above and additional options do exist.
Sole Proprietorship
A sole proprietorship allows an individual to operate a business without the requirement of filing formation documents with the Secretary of State. A husband and wife may also form a sole proprietorship, however if any non-spouse is a business owner, the business becomes a partnership. The business owner of a sole proprietorship does not receive any liability protections from the proprietorship and the owner has total control over and for all profits, losses, liabilities and taxes. A sole proprietorship with a business name other than the name of the owner must file a Fictitious Business Name Statement in the County where the primary place of business is located. The forms vary by county and are available on each County’s website.
Partnerships
A partnership is an arrangement wherein two or more people form a business for profit. In California, partnerships may be either general or limited.
In a general partnership, each partner is joint and severally liable for the obligations and liabilities of the partnership. For tax purposes, the income of the partnership is taxed as personal income of the partners. A general partnership does not have to be registered with the State however a Statement of Partnership Authority must be filed.
A limited partnership requires at least one general partner and one limited partner. The partnership provides some protection to the limited partners only. The general partner acts as the controlling partner and remains personally liable for the partnership’s debts and obligations. The limited partner has less control and participation in the business. A Certificate of Limited Partnership must be filed with the Secretary of Sate to form a limited partnership.
Corporations
A corporation is a legal entity separate from the owners. Personal liability of the shareholders is limited except for taxes levied against the corporation which are also levied against the shareholders. To form a corporation in California, Articles of Incorporation are filed with the Secretary of State. Thereafter, the corporation holds its initial meeting, designates its executive officers and directors, enacts bylaws, and issues stock. A variety of options are available for corporations, some of which are discussed below.
Generally, a type S corporation is limited to 100 shareholders or less and does not pay federal tax. Income, deductions, etc. “flow down” to the shareholders and the S corporation is subject to a 1.5% tax on net incomes however a separate bank account must be maintained for the corporation. Depending on the type of business performed, a type S corporation may be limited in nature. Formed under California law, type S corporation shareholders are not liable for business losses, and creditors may only recover from the corporation and its business assets (unless the creditor can “pierce the corporate veil”).
A type C corporation (General Corporation) by contrast is more general and may for tax purposes be a partnership or LLC. The number of shareholders is not limited and the corporation does pay federal taxes. A separate corporation bank account must be maintained. A type C corporation is perpetual in nature. Type C corporations may have shareholders, members or partners. The shareholders/members/partners may be liable for business losses and debts upon “piercing the corporate veil.” Creditors may recover from the corporation and its business assets or, in some instances, the shareholders/members/partners depending on the type of C Corporation.
A close corporation is a type of C Corporation. In this corporation, the ability of the shareholders to transfer their shares is restricted. The restriction must be in writing and approved by the Board of Directors in the Minutes. Further a Notice of Restriction should appear in the legend of the stock certificate.
Services We Provide
Our attorneys provide the following services to our business clients: (1) evaluation on a case-by-case basis of business plans and entity options; (2) preparation of articles of incorporation and other required forms and documents; (3) corporate kits and issuance of stocks; (4) agent for service services; (4) any such other legal services as my be required such as business contracts, leases, sale agreements, etc. Please contact us for a free consultation.