Do you have a business in California that you are ready to take to the next level? Have you found yourself asking what the difference is between an LLC and a Corporation and which entity structure could be best for your business? Did you even know there were options?
To begin answering these important questions, it is critical that you first take a step back and review the main entityoptions in California (there may be more than you realized): Corporation, Limited Liability Company (LLC), Limited Partnership (LP), Limited Liability Partnership (LLP), General Partnership(GP), and Sole Proprietorship. Each serves a certain function and has pros and cons, so determining which is best for your business will depend on your prioritiesand your circumstances. Because this can be a difficult process, consulting with an experienced and reputable business attorney in Los Angeles is a great first step.
Each of these entities have different formation processes and requirements, so it is a good idea to thoroughly consider your options before making a decision. It will save you time and money in the long run.
Corporation
Corporations are managed by “shareholders” and are governed by “Bylaws,” which detail the business’s management structure and should be kept with the corporation’s records, along with meeting minutes.
Pros: Once formed, corporations become an entity separate from its owners, which usually limits personal liability. Most venture capital firms and sophisticated investors prefer to invest in corporations for a number of reasons, including long term tax benefits upon a sale and corporate governance matters.
Cons: The shareholders and the entity are both taxed,separately (i.e., double taxation) unless you elect to become an S-corporation. This issue is more applicable to family businesses than startups seeking third party investors.
LLC
LLCs are managed by “managers” or “members.” LLC formation requires the managers or members to enter an operating agreement, detailing the business plan and management specifics, which must be kept with the LLC’s records, along with meeting minutes.
Pros: LLCs usually contain the same limitation on personal liability as corporations but do not tax the entity and the members separately (i.e., single taxation). The LLC allows for a more flexible structure and less corporate formalities than a corporation.
Cons: The required operating agreement is a formal contract between the managers or members, so this can lead to front-loaded negotiations to establish the management structure and get all parties on the same page (and willing to sign the agreement).
LP
There must be a “general partner” and a “limited partner.” Perhaps obviously, the general partner has more control than the limited partner (who is usually just a financial supporter).
Pros: If you have hesitant investors or partners, they may prefer a structure in which they serve as the limited partner, and thereby have liability only in the amount of their control. For example, if a limited partner has 20% control of the LP, he or she would be 20% liable for any of the LP’s obligations (unlike the general partner).
Cons: The general partner has unlimited personal liability for all of the entity’s obligations (e.g., debt).
LLP
These entities are reserved for specific types of licensed individuals: lawyers, architects, engineers, public accountants, and land surveyors. It also may be used by companies that provide services to those individuals (i.e., those that service LLPs).
Pros: Usually, each partner has personal liability protection from the other partners (if applicable) and the LLP as a whole.
Cons: There are specific insurance requirements for this type of business.
GP
It is not required to register a GP (although likely recommended). As long as there are two or more people engaging in business for profit, there is a GP.
Pros: Because there are no formal filing requirements, this can be a fairly straightforward (and expense-free) formation process.
Cons: Usually, partners are personally liable for obligations of another partner. Because there is not a filing requirement, you could have a GP and not realize it. Partners are usually jointly and severally liable for the GP’s obligations, as well. For taxation purposes, profits are considered the partner’s personal income.
Sole Proprietorship
You must file a “Fictitious Name Statement” in the county in which the principal place of business is if it has a name other that the sole proprietor’s name.
Pros:The owner maintains total control of the business and access to all of the profits.
Cons: Likewise, the owner remains fully responsible for the business’s liabilities and taxes.
While each of these options have pros and cons, many of which overlap, it’s easy to see that there is usually not one “right” choice. There are multiple options that could work for your business. So, hopefully that provides some comfort! The “right” choice for you will depend on your specific business and goals; for example, whether you have a business partner, a group of investors, you want complete control of decision-making, or an angel-based relationship with the business.
Whether you’re willing to take full responsibility for the business’s obligations in order to have access to all of the profits. Or whether you’re willing to split the profits with a partner to potentially decrease your liability. These are important considerations.
Contacting a business attorney in Los Angeles can be a great resource to discuss these options and develop a plan to begin the formation process.
Have Questions About Forming a Legal Business Structure? Contact an Experienced Business Lawyer in Los Angeles Today
Hakim Law Group stands ready to help small business owners and entrepreneurs. Our team of skilled and highly reputable business attorneys have worked in top tier international law firms and served as general counsel to major companies. This high level of diverse legal and business experience is paramount to our boutique approach – which produces more efficient, responsive and, ultimately, more effective results. For further information or to schedule an appointment with a leading business attorney in Los Angeles please contact HLG at 310.993.2203 or visit www.HakimLawGroup.com to learn more.
