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Business Formation

There are a number of entities to choose from when starting a business. They all offer certain advantages and disadvantages, but often they provide valuable benefits over operating a business as a sole proprietorship.

Your choice of entity is critical in limiting your liability exposure, tax requirements and ultimately maximizing your exit strategy. Below are some of the main types of entities and a brief overview of them. This can be a very complex decision and sets a foundation for your business and you personally. If you're serious about starting off on the right foot, consider setting up a consultation with one of our experienced business attorneys to work with you.

Sole Proprietorship

This is a simple, an inexpensive way to operate a business, BUT it offer no liability protection from claims against your business. This may be the route you want to take at the earliest stages of your business because of the low investment required.

Partnership

If there are two or more owners the simplest formation would be a General Partnership. 

Limited Partnership

This type of partnership offers limited liability for passive investors in the business, but there is always going to be a general partner who will have unlimited liability.

Corporations

The term 'Corporation' is an entity that provides limited liability, but requires certain formalities be followed. For tax purposes there are two types: "C" and "S" corporations.

"C" Corporation

This type of corporation is what is often referred to when talking about general corporations. It allows a business owner the ability to shield their personal assets from judgments against the business. Here, the corporation pays it's own tax the business owner pays income tax on their salary, and shareholders pay tax on dividends paid to them. This tax on dividends paid by shareholders is what is referred to when talking about "double taxation", since the corporation had already paid it's taxes on that money before distributing the dividends.

A C-corporation might be right to use when anticipating a re-investment of earnings back into the corporation, since (as of this writing) the first $50,000 is only taxed at 15%.

"S" Corporation

This type of corporation can eliminate the "double taxation" suffered by "C" Corporations. Here, a corporation files for "S" Corporation status with the IRS. Once approved owners report profits and losses on their individual tax returns while still retaining the ability to shield their personal assets from judgments against the business.

More mature companies may be looking to get profits out of the corporation cheaply and an S-Corporation would be better for that.

Limited Liability Company (LLC)

An LLC is a business entity created under state law that can shield you from personal liability. It combines the tax flexibility of a partnership with the personal liability protection of a corporation. LLC owners report their share of business profits and losses on their personal tax returns, similar to a general partnership. LLC owners can elect for the IRS to tax the LLC as a sole proprietorship, partnership, C Corporation, or S Corporation. Owners make this election through the IRS after the company forms with the state. 

Professional Corporation

Our Firm, Gianelli & Associates is a Professional Law Corporation. Many professional designations that require licenses to operate, such as law firms, accounting firms, doctors offices, architects and others may qualify to form a Professional Corporation (either "C" or "S") or a Professional Limited Liability Company. These entities help licensed professionals who are also business owners to protect their personal assets from judgments brought against their practices.

These are just a few of the entities available to someone starting a business in California. If you're currently operating a business but have yet to choose an entity, we strongly encourage you to do so at your earliest convenience. We've seen all too often that people loose everything because of an unexpected accident at their business when their family could have been protected with some advanced planning.

We represent over 600 corporations and over 200 partnerships. We can share our experience with you and work with you on your business decisions. We'd love to work with you in this decision process. Please call us at 1.209.521.6260 to see if we're a good fit for you.


Based in Modesto, CA Gianelli & Associates, PLC serves clients throughout California.



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1014 16th Street, Modesto, CA 95354
| Phone: 209.521.6260

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