You’ve finally decided to venture out on your own and start your company. Congratulations! The next big decision to make is choosing what type of corporate entity you should be.

There are many different corporate entities available; you just have to make sure whichever one you choose is right for your business. You can be a sole proprietorship, a partnership, corporation, or a limited liability company. It is imperative that you choose the business structure that fits your financial situation. Here is a brief introduction to a few types of common business structures and what they entail and require:

A sole proprietorship is a very common form of corporate structure since it is easy to form, has no corporate documents to file, and allows you to maintain complete managerial control. The major drawback is, however, that you would also personally be liable for all financial obligations of the business.

A partnership involves two or more people who come together and agree to manage a business together, as well as agree to share in both the profits and losses of the business. An advantage of the partnership is that it does not bear the tax burden of its profits, and instead profits and/or losses are “passed through” to partners to report on their individual income tax returns. Depending on whether you agree to be a general partnership or a limited partnership, you might need to file corporate documents with the California Secretary of State. Otherwise, a general partnership (the default status for a partnership) means that each partner is personally liable for all the obligations of the business.

A corporation is common entity structure. Although incorporating as a corporation might require some more paperwork drafted, as well as documents to be filed with the California Secretary of State, it also has significant advantages for doing so. By incorporating as a corporation, you are essentially creating a separate entity from yourself for both legal and tax purposes. The corporation itself is taxed as a separate entity, and thus is generally responsible for the debts and obligations of the business. It is also important to speak with a knowledgeable attorney or CPA to determine tax classifications for your corporation, given that one disadvantage of a corporation is the double taxation that you might face: once at the corporate level, and once more when dividends are paid to your shareholders (which in most cases, might just be you).

A limited liability company is a common form of business organization that is popular with new business owners. The LLC serves as a hybrid between a corporation and partnership by arguably combining the best of both worlds. An example of this is that profits and losses can be passed through to owners without taxation of the business itself, a characteristic of the partnership, while all of the members of the company are shielded from personal liability, a characteristic of the corporation.

While choosing a corporate structure might seem daunting, it does not have to be. Call us for a free initial consultation to see how we can help you on your new journey.

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