Business Formation & Entities
Starting a business is a very important decision and our clients trust us for guidance. We offer a number of services when our clients are legally forming a business. We explain the business entity types, which include corporations (c-corp, s-corp, professional corporation, non-profit), limited liability companies, partnerships (general and limited), commercial trusts (business trusts), sole proprietorships, and other business entities. When assessing the business, we factor in the risk, indemnification, liability, employment, cost, maintenance, and many other issues that our clients face when forming a business. From our experience, our clients frequently are unaware that certain risks exist – potentially jeopardizing the business.
The following is a general overview of different legal entities:
- Corporation – Stock. The most common form of corporate entity is a stock corporation. It comes in different shapes and sizes, generally described below. Some corporations are only restricted to certain operations or an industry. Generally, a corporation is a legal entity that is separate and distinct from its owners, referred to as shareholders. Shareholders own stock that represents their interest in the company. With some exceptions, the corporation shields the directors, officers, and shareholders from liability.
- Corporation – C-Corp. A “C-Corporation” is a stock corporation in its default form. In other words, when you form a “corporation,” you form a C-Corporation.
- Corporation – S-Corp. An “S-Corporation” is a stock corporation with a tax election that makes the legal entity a pass-through. Meaning, the individual shareholders declare the income and loss on their personal taxes. S-Corporation analysis should be done by a tax professional.
- Corporation – Professional. A professional corporation is a corporation for select industries such as doctors, attorneys, architects, dentists, or any service that requires a license issued by a California state regulatory licensing board, state court, or similar agency.
- Corporation – Close. A close corporation is a company that is owned by a select individuals that are usually closely associated with the business. With the increasing popularity of limited liability companies (LLCs), close corporations are not as frequent as they used to be.
- Corporation – Non-Profit – Public Benefit. A public benefit corporation is a non-profit corporation that is designed to benefit the public at large. A public benefits corporation is usually your local charity, homeless shelter, a literary club, cultural restoration center, a civil rights group, and many other types of organizations with a goal of public good at large.
- Corporation – Non-Profit – Mutual Benefit. A mutual benefit corporation is a hybrid between a for-profit and a non-profit corporation. It is designed to pursue both, for-profit and non-profit objectives. Generally, it adds a “public benefit” component into a for-profit structure.
- Corporation – Non-Profit – Religious. A religious non-profit is a corporation that is specifically formed to achieve a religious objective. Most churches, missionary centers, and religious groups are formed as religious non-profits. There are certain benefits to being formed as a religious non-profit corporation but it is not for everyone.
- Corporation – Non-Profit – Private Foundation. A private foundation is a corporate non-profit that has a single or a limited number of donors. Unless it is a hybrid with a public non-profit, the foundation is typically not engaged in any non-profit activity. Simply put, it’s an expensive wallet for other non-profits. Of course, the foundations have additional and stricter taxation requirements.
- Limited Liability Company (LLC) – Sole-Member. When a single individual opens an LLC, it is typically a sole-member LLC – a one man band of sorts. Although not designed for sole members, many individuals select this form of legal entity, mostly out of ignorance.
- Limited Liability Company (LLC) – Multi-Member. An LLC is a marriage between a partnership and a corporation. It takes the partnership component and wraps it into the corporate liability shield. LLCs are very popular as they offer legal protection for its interest holders and require minimal maintenance. Even though they are popular, they are not for everyone.
- Limited Liability Company – Manager and Member Managed. An LLC can be managed either by its members, owners, or managers. Most LLCs are managed by their members while others retain managers for its management. A manager is not an interest-holder.
- Partnership – General. A partnership is the association of two or more persons, or entities, to carry on a business as co-owners for profit. They offer no protection to the partners. Unless otherwise stated in the partnership agreement, both partners equally partake of the profits and the losses of a partnership.
- Partnership – Limited. A limited partnership is an association of two or more persons, having one or more general partners and one or more limited partners. Generally, the partner usually carries the risk while the limited partner does not.
- Partnership – Limited Liability. A limited liability partnership is a special type of partnership that affords limited liability to all its partners, created by filing a Statement of Qualification with the Secretary of State. It operates almost exactly as a general partnership except that the individual partners are not personally liable for any damages sustained by the partnership itself.
- Business Trusts. Business trusts have settlors (those who form the trust), beneficiaries (those who receive the ultimate benefits), and trustees (entities or individuals with whom the trust is made). There are alternative arrangements for some businesses. The business assets and services are “in trust” of the trustee. They require an independent trustee to run the businesses and avoid legal liability of the beneficiaries. If the trustee is not independent by law or fact, the beneficiaries may no longer be protected. Business trusts are known for abuse and are not recommended for most businesses.
- Sole Proprietorship (Sole Prop). A sole proprietorship is a business run by an individual. It offers legal protection and should be used only for low to no-risk businesses.
- Doing Business As (DBA). DBA is commonly interchanged with sole proprietorship. A DBA is a process under which either an individual or a legal entity operates under the name not otherwise registered.
Can I form my own company? It’s just a form that I need to file.
Isn’t an LLC the best legal entity to start a business?
The answer depends on several factors such as the nature of your business and most importantly, the interest holders. A consultation with a lawyer will assist you in selecting the correct entity.