As a North San Diego County business attorney, I am frequently asked:
“What kind of business should I be?” It usually depends on the type of business you want to do. The type of business entity should reflect the type of business you do.
“What business entities are commonly used?” In general, there are six most common business entities in use today, which are:
Single owner
General Society
Limited liability company
Limited liability company
Corporation
Subchapter S Corporation
“What is the difference between the different types of business entities?” Here’s a breakdown of the differences:
1. UNIQUE PROPERTY
SOLE OWNER = is a business owned and operated by one individual. Sole proprietorships are the basic forms of business organizations, which do not require any kind of formal government filing to form the business and are not required to follow any kind of operational formality.
The PROFIT = of a sole proprietorship is the taxation of business income and the deductibility of business losses on the individual tax returns of the business owners.
The LIABILITY = of a sole proprietorship is that the owner of the business is personally responsible for all the responsibilities and obligations of the business, responsibility that extends, not only to liabilities that exceed the amounts invested in the business, including any coverage of insurance, but also to the personal property of the business owner.
2. GENERAL SOCIETY
A GENERAL SOCIETY = is an association of two or more people to carry out a business. A general partnership is another type of business entity that is easy to form but requires a written partnership agreement to govern the operations of the partnership and the relationship between the partners.
The COMPLIANCE REQUIREMENTS = for a partnership are minimal and require that an Information Statement be filed with the State and the partnership maintains records to provide partners in relation to the proper exercise of partner rights and duties under the partnership agreement. .
ADMINISTRATION = in a general partnership it is extended to each partner so that each partner is an agent of the company and their actions generally bind the company.
The LIABILITY = of a general partnership is that a partner’s liability extends not only to that partner’s percentage of ownership in the business, but also to the partner’s personal assets.
3. LIMITED COMPANY
A LIMITED PARTNERSHIP = is a partnership formed by two or more people that has one or more general partners and one or more limited partners as co-owners of a business. A written partnership agreement must be established between the company and its partners and a written partnership agreement must also be established between the partners themselves establishing the general or limited partner classes.
COMPLIANCE REQUIREMENTS = For a limited partnership, more formal presentations to the State are required, such as filing a Limited Partnership Certificate and obtaining an agent to service the process.
ADMINISTRATION = in a limited partnership extends to one or more general partners who have exclusive management authority thus limiting the decisions of the limited partners in the business.
The LIABILITY = of a limited partnership is that the general partner is personally liable for the debts, obligations and liabilities of the partnership. However, the limited partnership allows limited partners to avoid submitting their personal assets outside of their investment. A limited partner is granted limited liability as long as the partner does not participate in controlling the business of the partnership.
4. LIMITED LIABILITY COMPANY
A LIMITED LIABILITY COMPANY = is an entity that has one or more members, organized under state statute. Limited liability companies have all the powers of natural persons, including the ability to conduct business transactions, sue or be sued, enter into contracts, own and transfer real estate, and issue shares subject to limitations.
COMPLIANCE REQUIREMENTS = for a limited liability company, more formality is required in the formation and operation, such as, submit Articles with the State, file an Information Declaration with the State, obtain an agent for the service of the process and establish an agreement operational.
ADMINISTRATION = in a limited liability company it can be carried out by all its members or by an administrator. Officers may be appointed to carry out business affairs.
The LIABILITY = of a limited liability company is limited to all its members, administrators and officers. Provided that the legal requirements of the State are met, the members, managers and officials of the company are not personally liable for any debt, liability or obligation of the company that arises in contact, tort or otherwise solely by being a member, manager or official. of the business.
5. LIMITED COMPANY
A CORPORATION = commonly known as C or regular corporation, it is by far the most common and well-known form of business entity. All corporations are governed by the state of incorporation and are treated as separate and distinct legal entities from their owners with all rights to property, contract, and sue on their own behalf.
COMPLIANCE REQUIREMENTS = for a corporation, strict compliance with the laws is required, such as filing the Articles of Incorporation with the State, filing a Declaration of Information before the State, obtaining an agent for the service of the process, establishing statutes, issuance of shares, establishing a board of directors, appointment of officers, holding annual shareholders ‘meetings, holding annual directors’ meetings, and keeping books and records of written minutes.
ADMINISTRATION = In a corporation it is generally carried out by the board of directors with the daily operations of the business in charge of the officers. General decision making rests with the shareholders of the company.
The LIABILITY = of a corporation is limited to all of its shareholders and the shareholder’s personal liability is limited to the investment. As long as the legal requirements of the State are met, the shareholders, directors and officers of the company are not personally liable for any debt, liability or obligation of the company arising out of contact, tort or otherwise.
6. SUBCHAPTER S CORPORATION
A SUBCHAPTER S CORPORATION = Commonly known as an S corporation, it is a corporation that has elected to pay taxes under Subchapter S of the Internal Revenue Code and is treated as a partnership for most tax purposes. The income of the S corporation is passed on to its shareholders, thus avoiding double taxation. Aside from the different tax treatment, the S corporation operates identically to that of a regular or C corporation.
COMPLIANCE REQUIREMENTS = for an S corporation are identical to those for a C or regular corporation, however, for a corporation to qualify as an S corporation, certain requirements must be met.
THE ADMINISTRATION = in an S corporation is identical to that of a C corporation or regular.
The LIABILITY = of an S corporation is identical to that of a C or regular corporation.