Those who want to start a business in California will need to consider how to structure their companies. A company is deemed to be a sole proprietorship unless its owner files paperwork to make it a partnership or corporation. Sole proprietors can be held personally liable for any damages that their organizations cause. While they retain total control over their companies, sole proprietors may struggle to raise funds, and it may not be possible to sell shares of stock.
Business owners who are looking to minimize their liability may want to consider forming a limited liability company. While members of an LLC may need to pay self-employment taxes, their personal assets are usually considered separate from a company’s assets. Corporations are business entities that are completely separate from their owners. One potential drawback is that profits are taxed at the corporate level and then again when distributed to shareholders as dividends.
It may be possible to avoid corporate taxation by declaring a company to be an S corporation. However, this type of entity must have fewer than 100 shareholders who are all citizens of the United States. Companies that are formed to serve the needs of a community are typically structured as nonprofit entities. If an entity obtains 501(c)(3) status, it is usually exempt from paying state and federal income taxes.
Reading a California business formation blog may make it easier for a company owner to determine how to structure his or her organization. It may also be possible to consult with a business law attorney to learn more about the pros and cons of different types of entities. An attorney may also help a founder create shareholder, partnership or other agreements that may make it easier to run a new company effectively.