When I form your California corporation, limited liability company or partnership, I personally walk you through all of the documents required to get your business up and running – from city business licenses to fictitious business names – and clarify what you need to do to maintain your business properly.
I suggest you steer clear of so-called bargain online services that form businesses. They can fail to complete steps that are legally required to establish your business, and unless they are lawyers they cannot give you legal advice. Many clients hire me to correct costly mistakes they made while trying to cut corners.
How are Corporations and Limited Liability Companies Similar?
As business structures, both corporations and LLCs are considered separate legal entities distinct from their shareholders (corporations) and members (LLCs).
They generally shield their shareholders or members from personal liability arising from business debts and business lawsuits. This means that by forming a corporation or LLC, you may be able to protect your home, real estate, vehicle, and other assets from being seized for a business debt or liability.
How are Corporations and Limited Liability Companies Different?
Corporations generally require more maintenance and paperwork than LLCs, and they are taxed differently.
LLCs are generally taxed through the members’ personal tax returns.
Regular corporations (C-corporations) are taxed as separate entities at the corporate tax rate, and any corporate profits that are distributed to shareholders through dividends are generally taxed through the shareholders’ personal tax returns. This is sometimes known as double taxation.
S-corporations are a kind of corporation with certain limitations (for example, they cannot have more than 100 shareholders), and the shareholders are generally taxed on their personal tax returns (unlike C-corporations, S-corporations generally are not taxed as a separate entities, so they avoid double taxation).
You should check with your CPA about the pros and cons of the different business entity types in relation to your specific tax circumstances.
Why Form an LLC?
Like corporations, LLCs generally shield their members from personal liability arising from business debts and business lawsuits.
Forming an LLC is a practical decision for many small business owners since LLCs require less maintenance and paperwork and avoid the double taxation that occurs with regular C-corporations. The individual members of an LLC are taxed on their personal tax returns, as opposed to C-corporations that are taxed on corporate tax returns (profits) AND individual tax returns (dividends).
People who own real estate holdings often prefer to form LLCs. Independent film producers also often use LLCs. LLCs generally are a good vehicle when there are only a few investors and simplicity is desirable.
The principal owners of an LLC are not generally required to be U.S. citizens.
Why Form a Corporation?
If you plan to have many investors contribute to your business or to raise money from the general public, then a corporation may be preferable. An LLC is workable when you have only a few investors, but it gets very complicated when you have more than just a few.
To satifsy investors, stock certificates issued by a corporation to its shareholders provide tangible proof of company ownership.
Unlike C-corporations, S-corporations are not generally subject to double taxation, which generally makes S-corporations the preferred corporation type for small businesses.
Non-resident aliens cannot be the shareholders of an S-corporation, but they can be the owners of a C-corporation or an LLC.
Why Formalize a Partnership?
It can be helpful to have a written partnership agreement to clarify your relationship with your business partner(s) and have something to rely on if disagreements arise. Consult with an attorney about the different partnership structures and which type may be most beneficial to you.
Are There Other Reasons to Form a Business Entity?
A good reason to form a corporation or LLC is to make it clear to others that you are a professional business. Another reason to form a corporation or LLC is that it may be the custom in your particular industry to have a corporation or LLC, such as in the entertainment industry where LLCs are commonplace. In addition, some business to business clients require the companies they work with to have the added legal protection of the corporate or LLC structure, or they will not do business with you.
Why Use Written Contracts for your Business?
Generally speaking, every California corporation is required to have a set of Bylaws, and every LLC needs an Operating Agreement that dictates how the business entity will function. It is vital to have these documents in writing and signed by the corporate officers or LLC members.
But beyond these necessities, why is it helpful to use written contracts? The first reason is that written agreements help to clarify your business relationships — with your employees, your clients and your business partners and associates (including payment terms, benefits, termination and the protection of confidential information).
The second reason is that even good, well-intentioned people disagree about the overall meaning and details of agreements. Having a clearly written contract gives you a document that minimizes misunderstandings and provides guidance should differences arise.
Why Use a Good Lawyer to Write Your Contracts?
While it may be tempting to write your own contracts, or even to find something on the Internet and adapt it to your needs, this can cause more problems than it solves. When agreements really matter–when they’re being challenged or being used to clarify intent–you need to have clear, legally binding language to protect your interests. Depending on the kind and scope of the agreement, provisions specific to your situation and certain kinds of boilerplate need to be included.
A good lawyer also knows how to anticipate potential issues before they occur and will include provisions in your agreement to protect against these problems.
Why Would I Consider Having Business Insurance?
Beyond the protection provided by forming a corporation or LLC, business insurance provides another layer of protection. For example, premises liability insurance can protect you in the event of a slip and fall accident at your business location. Product liability and general liability insurance may also be helpful.