Starting a Business and Choosing a Business Entity

Starting a business is a major life decision, and it is imperative to consult with a corporate attorney prior to forming a business entity. Corporate attorneys are able to explain the various business entities available to you and also address the various implications associated with each business entity. Once you have been advised as to all the available business entities an experienced corporate attorney can recommend which entity would be best suited to fit your needs.
Among the various things to consider when starting a business, one of the most critical aspects to consider is choosing the most appropriate business entity to meet your needs. Selecting a business entity to start a business should be based upon a few key aspects of the business you would like to start.

Some of these aspects include:

Control and management
Formalities under law

The following are the types of business entities California allows:

• Sole Proprietorship
• General Partnership
• Limited Partnership
• Limited Liability Partnership
• Limited Liability Company
• Corporation
• Professional Corporation

Below is a quick overview of each business entity type that can be formed in California.

Sole Proprietorship

A Sole Proprietorship is a business entity in which a single individual carries on business for profit. In California, a husband and wife can carry on a Sole Proprietorship together. With a Sole Proprietorship, there are no filing or meeting minute formalities. There is also no liability protection. The individual is liable for all debts and obligations of the business. If the Sole Proprietorship does not include the name of the individual they must file a fictitious name certificate and publish notice if the business name. The sole proprietor in the Sole Proprietorship is taxed on business income and deducts business expenses on their personal taxes.

General Partnership

A General Partnership is an association of two or more persons conducting business for a profit. The General Partnership is in existence by written or oral agreement. In distinction, a “joint venture” is a General Partnership for a particular transaction. The General Partnership business entity gives equal management and control to each partner. The liability for a General Partnership’s obligations and debts are joint and several. This means that a creditor can collect from either or both partner in any proportion they choose. A fictitious name certification is also needed for a General Partnership if the name does not include both partners’ names. A General Partnership business entity is not taxed separately. The General Partnership must file an informational tax return, but income and expenses are declared on personal taxes by distributive share (whether or not profits were actually distributed to partner).

Limited Partnership

A Limited Partnership consists of a general partner and a limited partner (or multiple general and limited partners). The general partner holds control and will be personally liable for the obligations and debts of the Limited Partnership. In a Limited Partnership business entity, certain formalities are required to be conducted and filed under the California Uniform Limited Partnership Act of 2008. A Limited Partnership also must have a written or oral agreement to be formed. A Limited Partnership also must file an informational tax return and pay a minimum $800 annual franchise tax.

Limited Liability Partnership

A Limited Liability Partnership is an association of two or more licensed persons. The partners can be licensed to practice law, architecture or accounting. Each partner must be licensed. Liability amongst partners in a Limited Liability Partnership business entity is determined by the agreement and shares distributed to each partner. The partners are not personally liable for debts of the Limited Liability Partnership, but are liable for their tortuous conduct or malpractice. A separate informational tax return must be filed for the Limited Liability Partnership business entity. In addition, the partners are taxed individually in portion to their share of income and loss based on their dividends and contribution.

Limited Liability Company

A Limited Liability Company can consist of multiple individuals, a single individual, or a combination of individuals and companies. A Limited Liability Company is created by drafting and filing articles of organization with the Secretary of State. An oral or written operating agreement determines if the Limited Liability Company is managed by designated managers or by all members. A Limited Liability Company business entity is a separate entity from the members, so the members are not personally liable for the debts and obligations of the company. A Limited Liability Company cannot be formed to conduct business requiring a license under the Business and Professions Code. Members are liable for unpaid taxes and actions in breach of their duties to the company and members should conduct meetings and keep minutes to protect from future fiduciary liabilities. With a Limited Liability Company business entity, if there are at least two members, they are taxed as a separate entity. If the Limited Liability Company consists of one individual, then it is taxed as a partnership, therefore the individual member is taxed (known as “Pass Through Taxation”), unless they file to be taxed as a Subchapter S Corporation. This means that the Limited Liability Company is taxed as a separate entity, but it does not affect the Limited Liability Company in any other way. Limited Liability Companies must pay a minimum $800 annual franchise tax and a graduated annual tax for income of $250,000 or more.


A corporation is a distinct legal entity that has powers of a person. The Corporation must abide by various formalities including filings, bylaws, ownership, meetings and minutes. The Corporation business entity is managed and controlled by a board of directors and officers. The Corporation’s directors and officers are shielded from liability, but may be pierced if they fail to abide by formalities.

Subchapter C Corporation

A corporation which has not opted to file an election by a Small Business Corporation to be taxed as an S Corporation, will be taxed under the Internal Revenue Code according to Subchapter C. For many smaller businesses, getting taxed as a C Corporation is not desirable because the Corporations’ income is subject to double taxation. In a C corporation profits will be taxed at two levels. First the C Corporation itself will be taxed on all its profits. Secondly, once shareholders are paid dividends, individual shareholders will have to pay individual taxes on their share of after-tax profits they receive.

Subchapter S Corporation

Both Limited Liability Companies and Corporations can elect to be taxed under Subchapter S of the Internal Revenue Code. The idea of an S Corporation (S-Corp) is often confused as being a separate entity from a general Corporation. However, a S Corporation is merely a general corporation that has filed an “Election by a Small Business Corporation” form, requesting that the Corporation be taxed under Subchapter S of the Internal Revenue Code, as opposed to Subchapter C. In this instance the Corporation or Limited Liability Company that has made the election is taxed as if it were a partnership, and company profits are no longer subject to double-taxation.

Given that the tax implications are desirable, there are a few requirements a Company must meet prior to filing their election to be taxed under Subchapter S. Corporations that meet these requirements generally share the following characteristics:

• The Corporation has no greater than 100 shareholders;
• All shareholders are individuals; (meaning no other business entities can possess an ownership interest in the Corporation)
• The Corporation is a domestic corporation; (generally speaking a ‘Domestic Corporation’ is one that conducts its affairs in its home country)
• The Corporation is not a member of an affiliated group of corporations; (meaning that the corporation itself is not a parent or subsidiary of another company)
• The Corporation only has one class of stocks.

Professional Corporation

A Professional Corporation is a Corporation in which the shareholders are licensed individuals in that specific profession and the formalities of a Corporation are followed. The Moscone-Knox Professional Corporation Act specifies the professions which qualify, including, but not limited to, accounting, architecture, medical practices, chiropractic, dental, law, clinical social worker, marriage and family counselors, psychological, and veterinary medicine. The directors and officers are afforded protection from liability, as long as the liability is not related to professional negligence.

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