As an owner-operated small business, you have successfully been operating as a sole proprietorship for quite some time now. When you decide to seek the legal protection and potential tax advantages of forming a separate business entity, it is important to choose the right type of structure for your company.
Consider these factors in determining what legal entity is appropriate for your small business.
Although a sole proprietorship or partnership is the most straightforward type of small business, these structures do not offer liability protection. With limited liability, the court cannot seize your personal assets to pay business debts or legal judgments. Choose a limited liability company or corporation if you have concerns about your personal financial responsibility for business obligations.
Sole proprietorships, partnerships and LLCs offer pass-through taxation. This means the owners report their share of the company’s profits and losses on their individual tax returns. This allows business owners to avoid the double taxation that affects corporations. If a corporation is the right structure for your business, however, you can potentially opt for pass-through tax treatment as an S corporation.
Recording and meeting requirements
Many small business owners prefer the simplicity of a sole proprietorship or partnership because they do not have to hold annual board meetings and submit official minutes. If you choose to incorporate your business in California, you must file an annual statement of information and franchise tax return. You must also hold an annual meeting of your directors and of your shareholders.
LLCs in California are not required to hold meetings but must file an annual statement of information. Because they do not necessarily have to have a board, they have a more flexible leadership structure than corporations do.
Before forming a legal business entity in California, weigh all your options carefully. The choice you make will impact the financial future of your company and your ability to successfully do business in the state.