It can be quite rewarding and exciting to start your own business in Los Angeles, California. In addition to being your own boss, you can also set your own schedule and make a living doing what you love. Even so, a lot of challenges come with being an entrepreneur.
As a result of not knowing how to properly set up a business, a majority of entrepreneurs fail before launching their businesses. Below are a few things you need to know in order to get your business up and running.
Selecting the correct business structure
Choosing the right business structure is perhaps the most crucial step in starting your business. By making a carefully considered decision, you can minimize taxes, reduce your personal liability and make sure that your business is funded and run in an efficient manner. It is therefore critical to decide which structure of the business is most appropriate for your particular case.
A good business lawyer can help you choose a proper business structure by taking into account all the necessary considerations. Moreover, the business lawyer can organize, draft, and fill the required documents with the state on your behalf.
Generally, there are five primary business structures that you can choose from:
- Sole Proprietorship
When it comes to business structures, the sole proprietorship is the simplest and it is not a legal entity. You’re not required to file any documents with the state. Important to note is that this type of business structure does not offer you any protection with regard to personal liability.
- Partnership
A partnership arises when two or more people come together to start a business. In this business structure, it is necessary to draft a written partnership agreement outlining each partner’s rights and responsibilities. It is not advisable to have oral partnership agreements as they easily result in future conflicts.
In addition to outlining partners’ responsibilities, partnership agreements also detail how profits and losses are shared. Other important clauses are also included. You and your partner should enlist the services of a contract lawyer to help you draft the partnership agreement.
Partnerships are attractive mainly because they do not pay income tax. Profits and losses are shared among partners and are therefore reported on each partner’s individual tax return. Each partner contributes to each business aspect – skill/labor, property, money.
As a result, with regard to the business’s debt, partners do not enjoy liability protection.
There are three types of partnerships; general partnership, limited partnership, and limited liability partnership. All partners are general partners in a general partnership. They all have unlimited liability and can incur obligations on the partnership’s behalf, within the scope of business.
A limited partnership comprises one or more limited partners and one or more general partners, whereby the liability of limited partners is limited to the amount of capital that they have invested.
- Limited Liability Partnership (LLP)
There is more than one owner in a limited liability partnership. However, unlike a general partnership, it offers some of its owner’s limited personal liability. All LLP owners have limited personal liability. These types of partnerships can be formed only by licensed practitioners such as accountants, lawyers, architects, or engineers.
Professionals prefer these LLPs to general partnerships, LLCs, and corporations because LLPs protect each partner from obligations against the partnership brought about by malpractice lawsuits against other partners.
- Limited Liability Company (LLC)
A limited liability company (LLC) is a combination of the operational flexibility and tax efficiencies (simple taxes) of a partnership, and the legal structure that gives the limited liability characteristics of a corporation. This business structure is popular and can be said to be the standard for companies.
The owners or members of an LLC don’t have personal liability for the LLC’s obligations. This business structure is the ideal choice for a startup that wants to flow through losses to its financiers. This is because LLCs offer complete liability protection to all members.
An LLC, unlike a corporation, does not pay tax as a separate business entity. Rather, all losses and profits “pass through” to the company to each member of the LLC. This business structure is common for real estate investments.
To start an LLC, you need two main documents:
- Certificate of Formation (Delaware) or Article of Organization (California) – You files this document with the secretary of state, setting forth the LLC’s name, address, term, agent for service of process, and whether the entity will be governed by member-appointed managers or the members themselves.
- Operating Agreement – It outlines the financial obligations of members, the governance policies, and how profits, losses, and distributions are shared. This document needs to be made to suit each member’s needs.
- C-Corporation
Also known as a General for Profit Corporation, a C-corporation is taxed separately from its owners. It is owned by shareholders and is a separate legal entity, meaning that shareholders are not held liable for the business’s obligations; it’s the corporation itself that is held liable.
Compared to sole proprietors, C-corporations pay a lower federal income tax. Therefore, if you’re planning to invest back into your business, you should consider the C-corporation as a means of reducing your income tax.
Generally, corporations are recommended for large, well-established companies that have many employees. To get the desired liability protection, corporations must observe more formalities. C-corporations are double-taxed, meaning both the corporation’s income and employees’ wages are taxed.
- S-Corporations
Initially, all corporations are registered as C-corporations. Thereafter, you can choose to be taxed as a pass-through entity and register an S-corporation by filing the IRS form 2553.
An S-corporation is not subject to double-taxation as its income is generally taxed to the corporation’s shareholders. Nevertheless, there are some requirements that need to be observed for you to form an S-corporation:
- A maximum of 100 shareholders
- Must be filed as a Domestic Corporation
- No non-resident alien shareholders
- Shareholding is limited to persons, estates, exempt organizations, and specific trusts
- Can only have one class stock
- Must end its tax year on December 31