How to Choose a Business Form that is Right for Your Company

There are different types of business organizations that you can choose from in the state of California. You need to ensure that you correctly structure your business in order to take advantage of legal protections available to you and in order to get the most favorable tax treatment. tax return

An experienced San Diego business lawyer at Sepahi Law Group, APC can assist you in choosing a business form that is right for your company. Call today to schedule a consultation with an attorney to get help structuring your business in the most advantageous way possible.

Choosing a Business Form that is Right For Your Company

Choosing the business form that is right for your company involves three primary considerations: the initial and ongoing paperwork requirements and costs; the tax treatment of the business; and liability protections. There are several common types of business organizations and your options include:

  • Sole proprietorship:  The simplest business form, available if you are the only owner. There are no initial startup requirements and no ongoing paperwork requirements or costs. Your business income and losses are declared on your personal tax returns and you are taxed based on your normal tax rate. You have no protection from liability and if the business is sued or goes bankrupt, you can lose your personal assets.
  • Partnership: Similar to a sole proprietorship in some ways, but with multiple owners. Profits and losses pass through to partners and are declared on personal tax returns. No liability protection is available. There are some initial paperwork requirements, including a partnership agreement to protect your financial investment.
  • Limited liability partnership (LLP): Allows some partners who are not actively involved with operating the business to limit their potential liability. At least one general partner must be fully responsible for the business and his or her personal assets are potentially at risk. Limited partners can limit their losses to the amount invested if they are not actively involved with operations. Profits pass through to owners just like with a partnership. There are filing requirements with the state with an LLP.
  • Limited liability company (LLC): Provides all partners with protection from liability but allows for profits and losses to pass through to owners as in a standard partnership. Annual paperwork must be filed with the state.
  • S-Corporations: A special type of corporation. You must elect to be treat as an S-corp. S-corps allow for pass through taxation which means owners declare profits and losses on personal tax return. Some income can be paid to owners in the form of distributions so payroll taxes do not need to be paid. Owners are protected from liability. The business must file paperwork to start the corporation and to elect S-corp status. Annual ongoing paperwork is required to the California Secretary of State as well as the Internal Revenue Service.
  • C-Corporations: The standard corporate form. Owners’ liability is limited to the amount invested. The business pays taxes on profits and takes losses and owners also pay taxes on their own profits from the corporation. Double taxation is possible without careful planning. Initial and ongoing paperwork must be filed.

An experienced San Diego business lawyer can help with choosing the business form that is right for your company. Call today to schedule a consultation and learn more.

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