STARTING YOUR OWN BUSINESS - PART 3B: A CONTINUED OVERVIEW OF CALIFORNIA BUSINESS TYPES
Hello all! It's been several weeks of talking about business. In the last article, Part 3A, I covered sole proprietorships, and general and limited partnerships. In this article, I will be providing you with the last bit of information regarding business structures in California: LLC and Corporations. If you missed any of my previous articles on this subject, you can contact Sereechai Newspaper or find the link to these articles on my website at: WWW.JC4LAW.COM
In review, a business structure is a legal entity that you form in order to operate your business. There are several different types available, all with their own benefits and protections. It is up to you and your advisors to choose which entity best serves your needs and circumstances.
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.
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.
Well there you have it. A good starting point if you have entrepreneurial dreams. If you have been following me and my previous articles on this subject, you should have a introductory knowledge of business formation and structures. As always, please do your own due diligence prior to making any important decisions. 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 have presented you with information and some personal examples of my own, that I hope will benefit you in your entrepreneurial endeavors. Good luck and best wishes to those pursuing their entrepreneurial dreams.
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.