Organizing Business Entities
We assist clients in forming business entities. In California, the most common forms for carrying on a business are:
- Sole proprietorship
- General partnership
- Limited liability partnership (available only to accountants, attorneys, architects, engineers and land surveyors)
- Limited partnership
- Limited liability company
- Corporation (including various kinds of corporations—statutory close corporations, professional corporations, S corporations, social purpose corporations and benefit corporations)
Sole Proprietorship. This is the simplest form in which to conduct a business. A sole proprietorship is not a legal entity itself. Rather, the term refers to a natural person who directly owns the business and is directly responsible for its debts. While all profits belong to the business owner, so do all losses. Thus, if the business is unprofitable, or other liabilities are incurred, the owner (sole proprietor) is personally liable therefor. I.e., the owner puts his or her entire personal assets and wealth at risk in a proprietorship. Moreover, an owner who is married (or in a registered domestic partnership) puts the community property at risk: Community property is liable for the contract obligations of either spouse (or registered domestic partner) incurred during the marriage (or domestic partnership). The business owner has total management authority, but may act through agents or employees. No formalities are required to engage in business as a sole proprietor (other than complying with any applicable licensing requirements). If the business is conducted under a name that does not show the owner’s surname, or implies the existence of additional owners, the owner is required to file the certificate and publish the notice provided in Bus. & Prof.C. § 17900 et seq. The only consequence of failing to do so, however, is that the owner is barred from maintaining legal action to enforce an obligation owing to the business until the certificate is filed.
General Partnership. A general partnership is a form of business entity in which two or more co-owners engage in business for profit. So long as the parties have jointly agreed to carry on a business for profit, they are general partners even though they have no specific intent to be “general partners” or have not reached agreement on how to share profits or losses. A general partnership has some of the attributes of a separate legal entity: (1) It can hold and convey legal title to real property in its own name (rather than in the names of the partners); (2) It can sue and be sued in the partnership name; and (3) It continues in existence notwithstanding the “dissociation” of one or more partners. But in most other important respects, a general partnership is simply a form of co-ownership by several persons. Except in a “limited liability partnership”, each general partner puts his or her entire personal resources at risk for debts and obligations of the partnership business: Each is jointly and severally liable to the partnership creditors.
Limited Partnership. A limited partnership is comprised of one or more “general” partners who manage the business and who are personally liable for partnership debts, and one or more “limited” partners who contribute capital and share in the profits, but who normally take no part in running the business and who incur no liability with respect to partnership obligations beyond their capital contributions. The purpose of this form of business entity is to encourage passive investors to invest in the enterprise, allowing them to reap a share of the profits if it succeeds, but without risking more than their capital contributions.
Limited Liability Company (LLC). A hybrid between a partnership and a corporation, a limited liability company (LLC) combines the “pass-through” treatment of a partnership with the limited liability accorded corporate shareholders. Like a corporation, which can have as few as one shareholder, an LLC need have only one “member”. Like limited partnerships and corporations, an LLC is recognized as a legal entity separate and apart from its “members” (i.e., its owners). The existence of an LLC begins upon the filing of articles of organization by the Secretary of State.
Limited Liability Partnership (LLP). Accountants, attorneys, architects, engineers and land surveyors may operate as a “limited liability partnership” (LLP), which is a hybrid form of general partnership. The principals can all participate in management (as in a general partnership) and yet still enjoy limited liability (as in a limited partnership) and partnership pass-through tax treatment.
Corporation. A corporation is a separate legal entity existing under authority granted by state law. It has its own identity, separate and apart from the persons who created it and from its shareholders. Normally, management and control is vested in the board of directors, elected by the shareholders of the corporation. The directors generally make policy and major decisions but do not individually represent the corporation in dealing with third persons. Rather, such dealings are conducted through officers and employees, to whom authority is delegated by the directors. The same persons may be stockholders, directors and officers of the corporation (and usually are in small corporations). Although the shareholders elect the board of directors, they do not directly control the board’s activities or decisions. A corporation can be created only by compliance with the General Corporation Law, which requires filing of articles of incorporation containing certain essential provisions. As a separate legal entity, the corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers or directors, or by transfer of its shares from one person to another.