Once you decide to establish a business, a primary consideration is the type of business entity to form. Tax and liability issues, director and ownership concerns, as well as state and federal obligations pertaining to the type of entity should be considered when making your determination. Personal and personnel needs and the needs of your particular type of business should also be considered.
The following is a brief overview of various business structures. The information is intended to provide a basic understanding of the different business structures and is not intended to provide legal advice.
Before you establish a business in the State of California, you should consult with a private attorney or tax advisor for advice about what type of business entity will meet your business needs, and what your legal obligations will be.
A California corporation generally is a legal entity which exists separately from its owners. While normally limiting the owners from personal liability, taxes are levied on the corporation as well as on the shareholders. The sale of stocks or bonds can generate additional capital and the longevity of the corporation can continue past the death of the owners. Legal Counsel should be consulted regarding the variety of options available.
To form a corporation in California, Articles of Incorporation must be filed with the California Secretary of State’s office.
Two New Types of Corporations (pdf ~51KB): Effective January 1, 2012, there are two new subtypes of stock corporations in California — a "flexible purpose corporation" and a "benefit corporation." The new corporation subtypes allow entrepreneurs and investors to organize stock corporations that can pursue both economic and social objectives.
A California LLC generally offers liability protection similar to that of a corporation but is taxed differently. Domestic LLCs may be managed by one or more managers or one or more members. In addition to filing the applicable documents with the Secretary of State, an operating agreement among the members as to the affairs of the LLC and the conduct of its business is required. The LLC does not file the operating agreement with the Secretary of State but maintains it at the office where the LLC’s records are kept.
To form an LLC in California, Articles of Organization (Form LLC–1) must be filed with the California Secretary of State’s office.
A California LP may provide limited liability for some partners. There must be at least one general partner that acts as the controlling partner and one limited partner whose liability is normally limited to the amount of control or participation of the limited partner. General partners of an LP have unlimited personal liability for the LP’s debts and obligation.
To form an LP in California, a Certificate of Limited Partnership Form LP–1) must be filed with the California Secretary of State’s office.
A California GP must have two or more persons engaged in a business for profit. Except as otherwise provided by law, all partners are liable jointly and severally for all obligations of the partnership unless agreed by the claimant. Profits are taxed as personal income for the partners.
To register a GP at the state level, a Statement of Partnership Authority (Form GP–1) must be filed with the California Secretary of State’s office. Note: Registering a GP at the state level is optional.
An LLP is a partnership that engages in the practice of public accountancy, the practice of law, the practice of architecture, the practice of engineering or the practice of land surveying, or provides services or facilities to a California registered LLP that practices public accountancy or law, or to a foreign LLP. An LLP is required to maintain certain levels of insurance as required by law.
To register an LLP in California, an Application to Register a Limited Liability Partnership (Form LLP–1) must be filed with the California Secretary of State’s office.
A sole proprietorship is set up to allow an individual to own and operate a business. A sole proprietor has total control, receives all profits from and is responsible for taxes and liabilities of the business. If a sole proprietorship is formed with a name other than the individual’s name (example: John Smiths Fishing Shop), a Fictitious Business Name Statement must be filed with the county where the principal place of business is located.
No formation documents are filed with the California Secretary of State’s office. Other state filings may be required depending on the type of business.
Please see our Frequently Asked Questions webpage for answers to the most frequently asked business entity questions.