Having a separate legal entity for your business protects your personal assets from business lawsuits and debts. California companies can choose from several different business entities with different structures and requirements.
Review the basics about these common business structures when establishing a California enterprise.
Limited liability company
As the name suggests, owners can create an LLC and become members to limit their personal liability. You must file LLC formation documents with the California Secretary of State. LLCs have tax flexibility since you can decide to pay tax on members’ individual returns or as a corporation. This business entity must pay the state’s minimum franchise tax, currently $800 a year.
S or C corporation
Corporate structure often makes sense for larger companies that want to issue shares on the private market to earn capital. Shareholders own both types of California corporations and do not have personal liability. They elect a board of directors to manage the business.
S and C corporations primarily differ in taxation. C corporations pay tax at the corporate level as separate entities. S corporations can opt for pass-through tax, which means that shareholders report the income and loss of their shares of the business on their personal income tax returns.
California businesses can also choose from different types of partnerships, including limited liability partnerships, limited partnerships and general partnerships. You can start an LLP only for certain types of professional practices such as accounting, law, architecture or engineering.
General partnership establishes a separate entity for your business but offers no liability protection. With limited partnership, certain partners can limit their liability.
Reviewing these structures in depth can help you make the right entity choice for your business.