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Entity Formation: Business Entities in California

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Entity Formation: Business Entities in California

business entities

It’s easier than ever to start a business. In fact, the number of small businesses in the United States reached over 33 million in 2022, according to the U.S. Small Business Administration. Starting a new business, however, comes with its challenges.

Aside from having a solid foundation for your business and the proper marketing to back it up and generate revenue, there are a lot of legal implications associated with starting and operating a business. As a business owner, being educated on the legalities behind business operations is key.

Fines, lawsuits, or penalties would do a lot of damage to your business (and your name). This is why having a strong business attorney is important when it comes to building a business from the ground up.

A business attorney will help you review the legal requirements for owning and operating a business. At the top of this legal checklist is understanding the types of business formation and which one would be best suited for your business.

Choosing the proper business entity and structure for your business affects everything from personal liability to fundraising and taxes.

What is a Business Entity? 

A business entity is an organization created by an individual to conduct business, engage in a trade, or participate in a similar activity. One of the first things you must do as a business owner is to choose an entity type. The type of business entity you choose determines both the structure of your organization and how it will be taxed.

Types of California Business Entities 

When you start a business, you have to register that business in the state in which it is located. Each state has its own laws regarding business registration and what business structures are available to you.

In California, there are several types of business entities.

Sole Proprietorship 

As the simplest business entity, a sole proprietorship implies that there is a sole owner or operator of the business. This is the easiest business entity to set up.

If you start a business and are the only owner, you are a sole proprietor by law. There is no separation between the owner/operator and the company itself. As a sole proprietor, you do not need to consult with anyone before making company decisions.

You are also entitled to all of the company profits. However, being responsible for all profits also means that you are held responsible for all company debts and losses.

Partnership

A partnership involves two or more owners. There are two types of partnerships. 

  • A general partnership means both partners have an active role in managing the company and share in all profit gains and losses.
  • A limited partnership is a registered business entity (and not automatic like a sole proprietorship or general partnership). A limited partnership involves two parties: one that assumes all operational and financial control of the company and one that is simply an investor. Limited partners, or investors, don’t have control over company decisions.

C Corporation

A C Corporation (C-Corp) is a legal entity that is separate from the company’s owners. The owners, or shareholders, alongside investors and a board of directors, have control over the corporation, but they are not actually tied to the corporation itself. So despite having a say in what goes on, the corporation shareholders aren’t responsible for any gains, losses, or debts that may occur. That all falls on the corporation itself.

Registering a corporation is a more complex process than that of a general partnership or sole proprietorship. This includes an increase in the regulations and tax laws that your corporation must abide by. You must register a corporation with the IRS, meaning state and federal taxes will apply.

S Corporation

While an S corporation (S-Corp) maintains the same liabilities as a C corporation, it is a pass-through for tax purposes.

This means that any net gains or losses pass straight through to the owner’s taxes, making them personally responsible for the financial moves of the corporation. There is no corporate-level tax involved with an S corporation.

Limited Liability Company 

Take what we know about sole proprietorships, partnerships, and corporations. In choosing the best aspects of each entity, you get a limited liability company or LLC.

LLCs have less paperwork and requirements than other entities, and you can choose how your company is taxed. You can choose to be treated as a corporation or a pass-through entity for tax purposes.

Creating an LLC, however, is more expensive than forming a sole proprietorship or partnership.

Trusted Business Lawyer in Los Angeles

When it comes to running your business, there are plenty of things to consider, and it can take a lot of work to keep track of all the legalities required to operate efficiently. Enlisting the services of an experienced business lawyer can ensure that any legal issues that arise in your business are sufficiently addressed and resolved.

With Rokita Law, you can breathe a little easier knowing you have a business lawyer on your side that offers many legal needs with experience, passion, and integrity. 

Located in Los Angeles, California, we practice in many areas, like civil litigation, business law, real estate law, and intellectual property, to give you well-rounded support with trusted, professional lawyers.
Schedule a consultation today to learn how we can help and watch your business thrive.