|
|
|
organization
Part of starting a new business entails selecting the type of business organization appropriate for you. If you have a CPA, small business accountant, or corporate attorney to assist - they will help you decide upon the best small business startup organization to select. Typically, you will be looking at these type of businesses if you are doing business in California:
- Proprietership
- This is the simplest form of business ownership. A single individual declares a business entity, in their own name or a Fictitious Name. Typically, you will need a business license for the city your business is located in, possibly a California Resale Permit, a business bank account, of course, possibly even a new business loan, an Application for Fictitious Name Registration if the name of the business is to be other than your own… and a publisher to publish your declaration of business for 3 consecutive days.
- Partnership (simple partnership)
- This is almost identical to a proprietorship - except that there is more than one principal in the business. When going into business with one or more partners, it is advisable to engage an experienced contracts attorney to draft a Partnership Agreement. This agreement will define ownership, responsibilities, and exit options - among other things. The primary reason for a well drawn partnership contract is to insure the survival of the business.
- Corporations
- Corporations offer legal protection to the owners of a business. In the event of a catastrophic lawsuit or verdict, awards to the Plaintiffs are only taken from the assets / insurance of the Corporation. Officers, owners, and employees of the corporation are protected from financial accountability by what is known as the 'corporate veil' - the legal protective mechanism that is designed to encourage investment by eliminating or drastically reducing personal risk. There are several types of corporate organizations commonly used:
- Sub Chapter S Corporation (S Corporations)
- The Sub S Corp provides legal protection to the owners but avoids double taxation (taxing the corporate profits and then taxing them again when they are distributed to the shareholders as dividends). Profits for a Sub Chapter S corporation are passed directly to the 1040 of the shareholder based upon the percentage of ownership. While this avoids double taxation - individual financial situations may make this vehicle a double edged sword. If you are in the southern California area, contact Al Rasch and Associates - business attorneys - for guidance on whether or not a Sub Chapter S corporation is best for you.
- C Corporation (C Corp.)
- This is the traditional corporation. Officers, employees, and shareholders (owners) are protected from legal exposure - however distributed profits are subject to double taxation as noted in Sub S, above. C Corporations hold the promise of enormous profit, however, in that if they are well managed - they can become public corporations. Shares of ownership in public corporations are traded openly in a variety of stock markets (NYSE, NASDAQ, etc.). The value of these shares is based upon actual profits, cash flow, market share, and the public's perception of the corporations future success. As a result, the shares are often traded at multiples of their per share earnings. A business owner who successfully builds their business into a publicly traded business entity stands to gain much in the way of capital gains (long term growth profits of original investment). Capital gains are realized once ownership (stock) is sold after a predetermined period of time and are usually taxed at a lower Federal and State tax rate.
- Limited Liability Company - Limited Liability Corporation (LLC)
- A Limited Liability Company (LLC) provides flexibility for business owners looking for the asset protection provided by a corporation with the ease of operation provided by a partnership.
- Typically, an LLC provides these types of benefits:
- The personal liability protection of a corporation.
- The flexibility to be taxed as a corporation or as a pass through entity such as a Sub S.
- Profits and losses from an LLC can be distributed in ways not necessarily based upon a percentage of ownership.
- Members are not exposed to the same restrictions as those imposed on members of S Corporations
- LLCs are more flexible and have less recurring reporting and other paperwork than corporations.
Al Rasch and Associates are corporate attorneys and small business lawyers practicing in Orange County and throughout Southern California. We are devoted to insuring the success of small and medium sized businesses. Even if you consider yourself simply a 'mom & pop' sized business, proper business organization and planning can have a positive impact on your tax liability, legal exposure, and improved cash flow.
|
|
|
