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STARTING YOUR OWN BUSINESS - PART 3A: BRIEF OVERVIEW OF CALIFORNIA BUSINESS TYPES

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Greetings everyone!  In this article, I will be providing you with some general information regarding California business structures, or entities.  A business structure is a legal entity that you must form in order to operate your business.  Which type you choose will depend on many factors and considerations, including but not limited to, taxes, personal liability, etc. As I mentioned in my previous articles, I am in no way a business guru. What I am, is an attorney and an entrepreneur who has experience – some good, and some bad. I am presenting you with information and some personal examples of my own, that I hope will benefit you in your entrepreneurial endeavors. As always, please do your own due diligence prior to making any important decisions.

The following are some of the more common business structures found in California:

SOLE PROPRIETORSHIPS

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).

GENERAL PARTNERSHIPS

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.

LIMITED PARTNERSHIPS

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 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, 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 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.

As I mentioned in the beginning of this article, this is a multi-part series. In the next article, I will continue covering California business structures of: Limited Liability Company, and Corporations.  Good luck and best wishes to those pursuing their entrepreneurial dreams.  If you have any questions still left unanswered or you have questions regarding other legal issues, please email me at: This email address is being protected from spambots. You need JavaScript enabled to view it. or contact my office at (818) 846-5639, or (818) 505-4921 for my Thai assistant. We are also on the web in Thai and English at: WWW.JC4LAW.COM

Disclaimer: The information contained herein have been prepared for informational purposes only and are not to be considered legal advice unless otherwise specified. If you have a specific question regarding your personal case, please contact the Law Offices of Joseph Chitmongran for a full consultation.