A. Sole Proprietorship
The sole proprietorship, with a single owner, is the simplest form of business enterprise. The owner has total control over the management of the business.
The proprietor must comply with all applicable permit and licensing requirements required under local, state, and federal laws. A proprietorship terminates upon the death or withdrawal of the proprietor or upon the sale of the assets.
Additionally, a proprietor is personally liable on all the contracts of the enterprise and is responsible for all of the debts and obligations of the business from his or her own personal assets. Use of a proprietorship is not generally recommended absent sufficient insurance and business activities that are highly unlikely to result in personal liability to the proprietor.
A partnership is an association of two or more persons to carry on a business for profit as co-owners.
1. General Partnerships
General partnerships consist of two or more partners, referred to as general partners. Each general partner is generally actively involved in the business. Formation of a general partnership requires the agreement of the parties, which can be implied from their conduct as well as from an oral or written contract. However, it is highly recommended that a general partnership agreement be written to clarify the terms of the parties’ agreement.
General partners are subject to personal liability for the obligations of the partnership. Unless limited by agreement, each general partner is entitled to participate fully in the management of the partnership business, and general partners stand in a fiduciary relationship to one another.
2. Limited Partnerships
Limited partnerships must be organized under statutes. A limited partnership consists of one or more general partners and one or more non-general partners, referred to as limited partners.
General partners of a limited partnership have the same rights of control and exposure to liability as general partners of a general partnership. Limited partners are passive investors who contribute cash and other assets to the partnership for use by the general partners in the conduct of the business. Limited partners have few rights to exercise any degree of control over the partnership business.
The liability of the limited partners may be restricted to their investment in the business. The interest of a limited partner is freely transferable, and the death, withdrawal, or retirement of a limited partner has no effect upon the operation of the partnership business.
C. Limited Liability Companies (LLC)
An LLC is another form of entity. The LLC is formed by filing articles of organization with the Secretary of State. LLC statutes do not require, the adoption of an “operating agreement” or “regulations” to govern the operation and management of the LLC. However, it is highly recommended that a written agreement be prepared regarding the operation and governance of the LLC.
The members may manage the LLC. Alternatively, the LLC can be managed by delegating management authority to appointed managers. The managing managers will be solely responsible for the management of the LLC.
Regardless of the management structure of the LLC, as a general matter, neither the members of an LLC nor its managers are liable for the debts or liabilities of the LLC. Additionally, California permits formation of single-member LLCs.
Several different types of corporations are recognized in California, including professional corporations and nonprofit corporations. However, for most new businesses, the relevant choices are the general corporation or a statutory close corporation. The commonly mentioned “S corporation,” which is discussed below, is a tax classification that may apply to either a general or close corporation.
1. General Corporations
A corporation has central management. That means that a Board of Directors has decision making authority. Board members are elected by the shareholders. The directors select officers and other agents to assist with the daily operations of the business.
Shareholders in the corporation have limited liability for debts of the business. Entity ownership interests can be transferred, although the shareholders may have reasonable restrictions on share transfers. Corporations have perpetual lives. Death or withdrawal of one or more shareholders will not automatically cause the termination of the corporation.
2. Statutory Close Corporation
Shareholders who want the limited liability of the Corporation without required procedural formalities associated with a corporation may form a “statutory close corporation.” In California, the statutes require that the corporation can only have a limited number of shareholders and that the shares be subject to various restrictions upon transfer.
A statutory close corporation usually conducts its daily operations according to a detailed shareholders’ agreement which may provide shareholders with flexibility regarding the management of the business, voting rights, restrictions on the transferability of shares and corporate formalities. However, the absence of the corporate formalities permitted by the use of the statutory close corporation may be risky to the shareholders.
Hire an Attorney to Help Safeguard your Business Interests.
It is often difficult to determine which entity is best to fit your goals. Our experience can help to educate you and your company regarding the various types of entities. Our skilled legal advice can help business owners and businesses keep their attention on the business and avoid costly legal issues. Contact us with to learn more at (925) 463-9000 or send an email.
Lisa Wills of the Law Offices of Lisa D. Wills is an experienced business law attorney in Pleasanton, San Ramon, Livermore and Danville, California helping to educate businesses. If you have questions concerning your business, contact Lisa Wills at the Law Offices of Lisa D. Wills or (925) 463-9000.