BRIEF OVERVIEW OF CALIFORNIA BUSINESS TYPES:
A sole proprietorship is a form of business in which a single individual carries on a for-profit business as the exclusive owner and decision-maker. A sole proprietor is personally liable for all obligations and debts of the business. Thus, the business assets and personal assets of the sole proprietor are subject to the risks of the business. While the vast majority of sole proprietorships are operated by single individuals, California recognizes a husband and wife that conduct a business jointly, hold joint title to the business assets, and still come within the definition of a sole proprietorship. In such operations, the marital community property is at risk and subject to attack by creditors. Because a sole proprietorship is the simplest form of a business entity, the business owner need not adhere to any special formalities. (Note: If the business is conducted under a name which does not show the owner’s surname or implies the existence of additional owners, the owner is required to file a fictitious name certificate/dba statement).
A general partnership is an association of two or more persons who operate a for-profit business as co-owners. California defines the term “person” as including individuals, partnerships, corporations, limited liability partnerships and companies, and other associations. General partners share equal management and control of the partnership, subject to their partnership agreement. Thus, a partner’s power to manage and control the partnership may be limited by the agreement. As far as personal liability is concerned, general partners are personally liable for partnership debts, and this liability is not limited to their proportionate share of the partnership. Because each partner is “jointly and severally” liable for the partnership’s debts, a creditor may attack 100% of a the debt from a single minority partner. This is the case because each general partner is deemed the agent of the partnership as a whole in dealings with 3rd persons in the conduct of partnership business. However, a partner who is found liable may seek indemnity from the other partners for their proportionate share of the debt if an indemnity provision exists in the partnership agreement. A partnership "at will" exists for as long as at least half of the partners agree to dissolve the partnership. Taxation - all partners report their distributive share of any profits realized by the partnership, whether distributed or not, on their personal income tax returns. The general partnership does not pay tax based on the entity itself, but must file an informational return, K-1, which discloses the income & expenses of the partnership along with each partner's distributive share.
In a limited partnership, there are two different types of partners; a “general” and a “limited” partner. A general partner has management and control of the organization and is personally liable for debts of the entity. His/her authority is limited by the California Uniform Partnership Act of 2008 (CULPA), and the limited partnership agreement. A limited partner does not participate in the management and control of the organization and liability is limited to his/her capital investment in the partnership. However, if a limited partner participates in management and control of the partnership, then the limited partner loses the shield protecting them from limited liability.
Under California law, a limited partnership is governed by the California Uniform Limited Partnership Act of 2008 (CULPA), with certain exceptions. CULPA requires a limited partnership to file a certificate of limited partnership with the Secretary of State and have a written or oral partnership agreement.
Capitalization Requirements - Both limited partners and general partners must make a contribution to the partnership. A contribution may consist of either tangible or intangible property or other benefit to the limited partnership, such as money, services performed, promissory notes, contracts for services to be performed, or other agreements to contribute cash or property.
Taxation - Similar to the general partnership, the limited partnership is a separate tax-reporting entity and must file an informational tax return, K-1. In addition, all California limited partnerships must pay the same minimum $800 annual “franchise” tax required to be paid by LLCs and corporations. While partnership income flows to the partners, and a general partner may deduct losses to offset income from other sources, a limited partner’s ability to deduct losses is restricted by the “passive activity” rules of the Internal Revenue Code.
LIMITED LIABILITY PARTNERSHIP (Accounting, Architecture or Law)
A registered limited liability partnership (LLP) is an association of two or more persons licensed to practice accounting, architecture or law, carried on as co-owners of a business for profit. In an LLP, partners are not personally liable for the partnership debts. However, partners can be personally liable to third parties based on their own tortious conduct or malpractice.
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Business Structure & Entity Formation / Business Plans for Financing / Lease Negotiations / Contract and Agreements / Beer-Wine Processing
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Includes both standard civil court actions covering other practice areas as well as Small Claims court case evaluation and preparation assistance.
DISCLAIMER: The information on this website is for general informational purposes only. Nothing on this or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. The information on this website is not intended to create, and receipt or viewing of this information does not constitute an attorney-client relationship. Since each case is based on its own merits, past success does not dictate present or future success.
Law Offices of Joseph Chitmongran
209 West Alameda Avenue, Suite #201
Burbank, California 91502
Phone: (818) 846-5639
PASADENA (COMING SOON)
We guarantee effective and comprehensive representation for your business. Our reputation and history of establishing successful companies and obtaining approvals for our clients speak for themselves. We pride ourselves in helping businesses - large or small, that simply need to know how to proceed in today's economy.
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Law Offices of Joseph Chitmongran
"Given the state of the economy today, you should start in the best possible position you can - and that is, with sound legal advice."
As an entrepreneur himself, attorney Joseph Chitmongran understands the joy as well as the concerns of business owners. Let's face it, the reality is grim: 50% of new businesses close within the first year; 30% close within 2 to 5 years; and only 20% of the initial startups remain open for over 10 years. The truth is, starting your own business is not easy, especially in these economic times. Just as there is no one reason why a business fails, there is no one reason why it succeeds. To be successful, you need a multitude of things, including the know how, a tenacious drive, and honestly, luck. Given the state of the economy today, you should start in the best possible position you can - and that is, with sound legal advice. Regardless of whether you are in the planning stage of starting a business or you are already an owner of an established business, sound legal advice can help increase your chances of success.The fact that you are here is a step in the right direction. The Law Offices of Joseph Chitmongran has helped many business owners who were once in your position. Review below the services we provide and contact us to see if we can help you too.
HERE ARE SOME BUSINESS SERVICES WE CAN ASSIST YOU WITH:
A business plan is generally your way of setting your goals for the business and your ideas of how to achieve those goals. The exact content of your business plan will depend on your target, whether it is strictly internal for you and your team, or for external purposes such as when submitted for financing or leasing options. In such cases, the business plan will have to be more detailed, often including a market analysis, competition research, operations and management plan, just to name a few.
LANDLORD NEGOTIATIONS, LEASE OPTIONS & DUE DILIGENCE
Location is said to be one of the most important factors one should consider when opening a business. Chosing the right locale can literally make or break a business venture. Once you have your location (and hopefully at least your internal business plan), then you will have to negotiate a lease or purchase. In either case, due diligence is required. For a lease, consider how you deal with the landlord as far as terms of the lease, options, signage, common area expenses, sublease possibilities, etc. Attorney Joseph Chitmongran can advise you in all leasing matters, including simply reviewing the lease, or working on your behalf in full negotiations with the landlord and/or management.
STRUCTURE & ENTITY FORMATION
Creating a business identity apart from your personal identity is very important for all business owners. By choosing the right form of entity, you effectively protect your personal assets from suits and other actions. The state of California recognizes numerous forms of business entities, each with important distinctions. Six of the major forms of business entities are: sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability companies, and corporations. At the Law Offices of Joseph Chitmongran, we can assist you in determining what type of structure best fits your needs and goals.
LIMITED LIABILITY COMPANY
A limited liability company (“LLC”) is a hybrid between a partnership and a corporation in that it combines the “pass-through” tax treatment of a partnership with the limited liability protecting corporate shareholders. Generally, only the LLC can be held responsible for the entity’s debts, and member(s) and/or manager(s) of an LLC are not personally liable. However, both the members and managers may be liable for unpaid taxes and actions in breach of their duties to the company and its members.
An LLC requires only one “member”, and is recognized as a legal entity, separate and apart from its member or members. A business required to be licensed under the Business and Professions Code cannot operate an LLC, unless expressly authorized by statute. Forming an LLC requires filing an articles of organization with the Secretary of State among other formalities.
Unless the Articles of Organization provide for centralized management by managers, the management of an LLC is vested in all of its members, and an LLC member’s management and control rights are similar to that of a general partner. Members may be either natural persons or some other business entity form.
An LLC with at least two members can elect to be classified as either an association (i.e., corporation) or a partnership, and an LLC with only one member can elect to be classified as an association or to be disregarded as an entity separate from its owner (i.e., a sole proprietorship). In California, in addition to the minimum franchise tax, an LLC must also pay a graduated annual base for all income of $250,000 or more from all California sources.
A corporation is a distinct legal entity, existing apart and recognized separately from its owners or shareholders, and has all the powers of a natural person, including the rights to own property, sue in its corporate name, and make contracts. While corporations are governed by the General Corporations Law [Corporations Code § 100 et seq.], the rights and obligations of its shareholders and directors may be altered to some extent by agreement. Because of the protection a corporation affords its shareholders, formation of corporations require certain formalities be adhered to, such as filing Articles of Incorporation with the Secretary of State, the creation of bylaws, the issuance of shares, maintenance of shareholders’ and directors minutes, etc.
A corporation is managed and controlled by a board of directors and officers. The directors are elected by the shareholders, and officers are appointed by the board of directors. While the governing documents may set forth limits on the authority of directors and officers, the day-to-day operation of a corporation is generally empowered in the hands of its officers. However, shareholders may serve on the board of directors and be appointed as officers.
The primary reason a business incorporates is to shield the shareholders from personal liability. Thus, if the corporation is properly formed and operating, shareholders, directors and officers are not legally responsible for corporate liabilities. However, the veil of protection offered to shareholders may be pierced if the corporation fails to adhere to the statutory formalities.
Capitalization - A corporation must make a good faith effort to assure the initial capitalization is adequate for the proposed business (i.e. the amount necessary to meet the reasonably anticipated expenses of the corporation until such time as the corporation is profitable). There are limits on the consideration for which a corporation may issue its shares. Shares may be issued only for money paid, past services actually rendered to the corporation, debts or securities canceled, and property transferred to the corporation.
Taxation - With the exception of a corporation which has elected to be taxed under Subchapter S of the Internal Revenue Code, a regular business corporation (as differentiated from a professional corporation, discussed below) is generally considered a separate taxable entity and must pay federal and state taxes. As a result, a corporation’s income is subject to double taxation. For instance, a corporation will pay taxes on its profits, and the individual shareholders will pay taxes on the corporation’s after-tax profits, which are paid to the shareholders in the form of dividends.
Sub-Chapter C Corporations - A general business corporation which has not made a special election under Subchapter S of the Internal Revenue Code is taxed under Subchapter C of the Internal Revenue Code in accordance with a corporate tax rate schedule.
Sub-Chapter S Corporations - An election under Subchapter S of the Internal Revenue Code only affects how a corporation will be taxed. A regular business corporation which has made an election to be taxed under Subchapter S of the Internal Revenue Code is taxed as if it were a partnership. The Subchapter S corporation is an entity existing for tax purposes. To qualify as an S corporation, the following requirements must be met (subject to a few exceptions):
The number of shareholders must be no greater than 100 (Federal law provides for 100, however it is recommended that there be no more than 35, in order to qualify for other exemptions in California);
Shareholders must be individuals;
The S corporation must be a domestic corporation;
The S corporation may not be a member of an affiliated group of corporations; and,
The S corporation must only have one class of stock
PROFESSIONAL CORPORATIONS (Eligible Only to Specific Professionals)
A professional corporation is only eligible for those who provide professional services and such entity must receive a certificate of registration issued by the governing board which regulates that profession. A person defined as a professional in the state of California may only form a professional corporation. They may not form a basic corporation, limited partnership or limited liability company. (These professions include: accounting, architecture, audiology, medical acupuncture, chiropractic, dental, law, licensed clinical social worker, marriage, family and child counselors, nursing, optometry, pharmacy, physical therapy, physicians (including naturopathic doctors, podiatry and osteopathic), physicians’ assistants, psychological, speech language pathology, and veterinary medicine). These professionals may designate their professional corporation as either a “C” or “S” entity for tax purposes. While there are exceptions, most professional corporations choose to be designated for "S” type.
Liability - The shareholders of a professional corporation are generally limited to licensed individuals in that profession and are afforded protection from liability, as long as the liability is not related to professional negligence. Directors and officers must also meet licensing requirements, as set forth in the Moscone-Knox Professional Corporation Act.
Contact us and we can assist you in choosing the best type of entity for your business venture.