California, in recent decades, has emerged as the startup capital of the world and people from across the United States and the rest of the world are coming to the state to set up shop. However, before starting a business in California, an entrepreneur needs to decide the type of business entity that is to be set up. For that, IT entrepreneurs need to understand the various types of entities that can be formed in the state.
In California, there are six types of business entities that an entrepreneur can choose from. This blog post will focus on the first three types: Corporations, Limited Liability Companies and Sole Proprietorships. The next post will discuss General Partnerships, Limited Partnerships and Limited Liability Partnerships.
A Corporation is an entity that exists separately from its owners. The personal liability of the owners is limited, and taxes are levied on both the corporation and its shareholders. Sales of stocks and bonds to generate capital are permitted and the corporation can continue business even after the owners’ death.
In a limited liability company, or an LLC, the owners have liability protection, but the taxation system is different from that of corporations. A domestic LLC can be managed by one or more people who act according to an operating agreement that is related to the LLC’s affairs and the conduct of its business.
Sole proprietorship is the third type of business entity that one can choose to form. In this setup, an individual can own and operate a business in the state. The owner has complete control over the business and receives all profits generated from it. The owner is also solely responsible for all taxes and liabilities.
Choosing a business entity is the first major decision that an entrepreneur needs to make. It is a decision that needs to be made after considering tax and liability issues, ownership concerns and legal obligations per current state and federal laws. In view of these legalities, which can often be challenging, it may be wise for entrepreneurs to seek guidance from an attorney with experience in California business laws.