Business formation in California: Tips for entrepreneurs

Starting a business in California is exciting, and terrifying. Entrepreneurs are wise to consider the following steps when starting their own business.

Entrepreneurs looking to start a business in California need to take a number of considerations into account before going into business. California's Governor's Office of Business and Economic Development recommend that entrepreneurs put together a business plan and set aside capital raised through savings, home equity or commercial loans.

It is also wise to review various business structures to determine which will best serve the needs of the business. The chosen formation will impact personal liability and taxes. Some of the common business structures available to entrepreneurs in California include:

  • Sole Proprietorship. This formation is useful for entrepreneurs that own and operate the business on their own. Benefits include the ease of formation and complete control granted to the owner. Risks include the lack of personal liability protection from debts connected to the business.
  • Limited Partnership. Two or more people are involved in this formation. At least one partner is a general partner with management authority and personal liability while another takes a limited partner role, and is a passive investor in the business. Limited partners are liable only for the amount invested, while general partners take on a greater portion of liability risks.
  • Limited Liability Company. Also known as an LLC, the limited liability company consists of owners, referred to as members, and provides liability protection. However, members can increase their exposure to personal liability if they guarantee debt obligations of the business. A recent piece in Entrepreneur discussed this, noting members should carefully review mortgage and other financing documents to ensure no personal guarantees are included. These guarantees could undermine the protections offered by the LLC structure. The LLC can be taxed as either a corporation or partnership. Unlike a limited partnership, only one member is required.
  • Corporation. The owners of a corporation are called shareholders. A corporation also has a Board of Directors and officers. Similar to the LLC, a corporation is its own legal entity, separate from the shareholders. As such, the corporation itself is liable for debts incurred by the business. Like an LLC, shareholders of a corporation may increase their personal liability exposure if they personally guarantee any corporate debt. In certain circumstances, the corporation can elect to be taxed as a partnership through a Subchapter S election filed with the IRS. Unlike a limited partnership, only one shareholder is required.

Determining which structure is right for your business needs is an important decision. As a result, it is wise to seek the counsel of an experienced business formation lawyer. This legal professional will review your business needs and help better ensure long-term success.

Keywords: business law