If you want to start a small business in California, one of the first things you need to do is create a legal entity. The type of business entity you choose may affect your operation methods, taxes and hiring practices.
According to the California Secretary of State’s website, the government recognizes several different types of business structures. Small businesses may form a sole proprietorship or a limited liability company. Larger businesses may work better as corporations.
Sole proprietorships and LLCs
A sole proprietorship provides individuals with a fairly simple way to own and run a business. As a sole proprietor, you have complete control over operating your business, and you may even operate under your own name. You are solely responsible for your business taxes, and all profits go directly to you. If you prefer to use a different business name, you may file a Fictitious Business Name Statement with your county.
Creating an LLC usually removes personal liability. Under an LLC, you are not personally responsible for your business debts. If you are the only member of your LLC, your tax situation may be similar to that of a sole proprietorship.
If you want to run your business with another person, you may form a partnership. In a general partnership, all partners have responsibility for business liability, and they pay personal income taxes on profits. A limited partnership may allow one or more partners freedom from business liability. The LLP (limited liability partnership) structure is only available to people who provide services such as engineering, land surveying, law and public accountancy.
In a corporation, the business is separate from the owners, so owners do not maintain personal liability, and the business pays its own taxes. Corporations generally have shareholders and directors.