Fletcher Law Practice assists businesses with formation, contract negotiation, and litigation.
Businesses often need the assistance of trained attorneys to help form initial agreements, review essential aspects to business law, and effectively operate within local jurisdictions. In the course of any business, owners will also become subject to possible legal actions against themselves or their businesses. Fletcher Law Practices helps business owners understand and manage the legal aspects of their business including: Formation, Governance, and Litigation.
When first starting the business, owners must first determine how they want to organize their business. Options include 1) sole proprietorship, 2) partnership or limited partnership, 3) limited liability company and 4) corporation.
A person opening up his or her own business can choose simply to form a sole proprietorship. This is the most basic form of business where the owner generally needs only to register with the local municipality and the county. Sole proprietorships offer the cheapest form of business as the State levies no additional taxes on the business as opposed to a limited liability company or corporation. The business also offers no changes to filing taxes as all of the revenue earned by the business flows directly to the owner and is taxed as income to the owner. For individuals who want to operate a small business, a sole proprietorship offers the best option to serve his or her needs.
PARTNERSHIP AND LIMITED PARTNERSHIP
Partnerships offer the same basic principles of the sole proprietorship. The major difference between the sole proprietorship and the partnership is that the partnership involves more than one person. A group of individuals forming a partnership should enter into a partnership agreement. Partnerships do have more specific regulations prescribed by the California Uniform Partnership Act passed in 1994 and amended in 1996. Partners may also choose to file the partnership with the State.
Limited Partnerships (“LP”) offer more protection than a basic partnership. In a LP, partners have two categories: general partners and limited partners. General partners bear full responsibility for all activities of the business, including daily operations, similar to the liability under a standard partnership. Limited partners only have liability up to the extent of their interest in the business. Limited partners, however, cannot engage themselves in the daily activities and can only perform services specific to their limited involvement in the business. To form a LP, general partners must register the business with the State of California
LIMITED LIABILITY COMPANY
The current trend for businesses not needing to issue stock and form a corporation is to create a Limited Liability Company (“LLC”). The LLC most notably offers its owner protection from personal liability and can be created by a sole business owner. People, however, over estimate the protection the LLC initially offers. When a person first forms the LLC, any contract, loan, or real estate agreement will often require collateral to guarantee the obligation. Overtime, the owner can separate him or herself from these agreements and have the LLC accept full responsibility for the obligations.
The LLC will also need to obtain insurance to protect against tortuous acts depending on the scope of the business. It also does not shield against fraud. In the early stages of the business, the LLC doesn’t offer substantial protection one might envision because the insurance will cover most major issues, lenders will require personal responsibility, and the business cannot protect against intentional misuse. If a person wants to open up a small home business, or a low revenue business to help with tax write offs, an LLC may not be an ideal choice for the business. The LLC, however, offers several clear advantages to larger solely owned businesses, partnerships, and LPs by offering individual protection when the business has sufficient collateral.
To form an LLC, a person need only file the articles of incorporation with the State of California and pay all necessary fees. The business should also consider getting a fictitious business name in the county where domiciled to prevent other businesses from opening as a DBA under the same name.
LIMITED LIABILITY PARTNERSHIP
Any profession requiring a license cannot form an LLC in California. These typically include doctors, lawyers, and accountants. The state has instead permitted licensed individuals to form Limited Liability Partnerships (“LLP”). The LLP acts as a hybrid LP and LLC. Unlike the LP, the LLP need not have a general partner. Each partner, instead, individually has protection from any claims against the business. Unlike the LLC, the LLP must have two or more members. To form an LLP, the partners will need to file with the State of California and pay all necessary filing fees.
Corporations continue to offer the best solution for large capital enterprises. Start up companies who have investors will want to establish a corporation to offer shares as collateral for investments. Corporations also ensure future investment opportunities through the issuance of stocks and bonds. If the intention of the individuals or partners is to develop a high risk or quickly generate large volume of revenue, the corporation option provides the most flexibility and best option for all of the involved parties.
Incorporation of the business will depend upon the goals of those forming the business. If the business will not generate substantial revenue initially, the parties should consider choosing and alternative other than a corporation to limit tax liability. If the parties decide to form a corporation under these circumstances, they are better served by filing in their own state. When individuals form a corporation out of state, they still must pay taxes to their state for operating a “foreign corporation.” A foreign corporation means a business incorporated in a state other than where a majority of the business occurs.
In high revenue or high-risk corporations, traditional options of filing in Delaware, Nevada, or Wyoming, become viable options. Depending on the state of choice, each offer different benefits depending on the needs of the corporation.
Individuals or groups considering opening a corporation should also determine whether or not to form a “S-Corp” or “C-Corp.” S-Corporations, often referred to as “S-Corps,” have been outdated mostly with the use of LLCs. The S-Corp allows for the structure and benefits of a corporation but permit flow through taxation. S-Corps also have limitations as to how much revenue they can generate and who can hold an interest. Because of the benefits of LLCs and limitations placed on S-Corps, on most occasions, individuals or groups should considering entering into an LLC prior to a S-Corp.
C-Corporations, C-Corps, are the most commonly envisioned traditional corporation. The C-Corp holds its own revenue and disperses payments either as salaries or dividends. As a traditional corporation, the C-Corp allows immense flexibility with governance, issuance of stock, and ability to raise capital. C-Corps also have greater flexibility than other business entities to open subsidiary businesses. Because of the flexibility, ability to raise capital, and protection, the C-Corp remains a often used for larger or rapidly growing businesses.
Opening either an S-Corp or C-Corp require registering with a state, drafting articles of incorporations and by laws, and complying with local regulations. To learn more, contact a local attorney and accountant who can better advise as to the implications and benefits.