One of the most important and sometimes most difficult decisions is the proper legal form for your business. There are three basic legal forms, each described below: the sole proprietorship, the partnership, and the corporation.
Generally, the decision should be made with reference to several factors simplicity and cost of organization; control and decision-making; taxes; and responsibility for the debts and other potential liabilities of the business. Below we describe the characteristics of each legal form with these factors in mind.
Features of Sole Proprietorship.
- Simplicity It requires no formal action to set it up.
- No Registration with State Required However, registration as "dba" is recommended if fictitious name is used. Requires filing of fictitious business statement with the County.
- Business Income is Personal income. Income of business is treated as income of individual for tax purposes
- Business Debts are Personal debts Debts of business are treated as debts of individual.
- Personal liability. Owner is not shielded from liability from lawsuits.
Features of Standard Partnership.
- Written Agreement is Advisable It requires no formal action to set it up as a partnership. However, a written agreement between between partners is strongly advisable.
- No Registration is necessary.
- Business Income is Personal. Income of business is treated as income of the individual for tax purposes.
- Business Debts are Personal debts. Debts of business are treated as debts of partners.
- Personal liability. Partners are not shielded from liability.
Features of Limited Partnership.
- Written Agreement is necessary. A rather long, complicated partnership agreement and offering documents must be drafted, usually by an attorney.
- Registration is necessary. Registration with the Department of Corporations is necessary for most limited partnerships.
- Business Income is Personal. Partnership Income as paid to general and limited partners is income of those partners for tax purposes.
- Business Debts are Personal debts. Limited partners are insulated from the debts of the limited partnership in most cases. Debts of partnerships are treated as debts of general partners.
- Personal Liability General Partners are not shielded from liability. Limited partners are protected.
Features of Corporation and S Corporation.
- Requires Legal Filing. It requires corporate documents to do drawn up, generally by a lawyer. Articles of Incorporation are filed with State Secretary of State. Corporation formalities must be followed. This means that certain legal must be kept on an ongoing basis, such as shareholder meeting minutes, directors' meeting minutes, records of stock transactions.
- Registation is necessary. Registration with the Department of Corporations is necessary. Formation of an S corporation requires an additional declaration to that effect to the IRS.
- Business Income is not treated as Personal. In a normal corporation, income of business is not treated as income of the individual for tax purposes. Only dividends paid to shareholders [or salary paid to employees] is treated as income. In the case of payment of dividends, this can subject the company to double taxation under certain circumstances. Unlike other corporations, an S corporation's income is treated as the income its shareholders just like a sole proprietorship.
- Business Debts are not Personal debts. Debts of business are not treated as debts of individual partners. For example, corporation can go bankrupt even while shareholders are solvent.
- No Personal liability. shareholder(s) shielded from liability as long as the corporate formalities are followed.
WARNING: The following is article
discussing legal issues. It is not intended to be a substitute
for legal advice. We recommend that you get competent legal
advice specific to your case. If you would like such advice
from our office, call (415) 777-4445 or (916) 349-2900 or
(408) 993-9737.
|
