Law Offices of Bonnie Follett - Business Forms

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Choosing a Business Form -
Brief info on some common choices

• Sole Proprietor

This is the usual way to start your one person company. However, you remain personally liable for all debts and liabilities of your business - your personal assets can be reached to satisfy debts and liabilities your business incurs.   Income through your business is reported on Schedule C attached to your Federal 1040.   Depending on your goals and the relative success of your business, you will want to eventually consider other options for your business form, such as whether to incorporate your business, form a partnership with associates, or form an LLC (limited liability company).

• C Corporation

Forming a corporation for your business creates a separate legal entity. This protects the shareholders of the corporation from many liabilities, but it also requires many formalities under the law that must be strictly followed. You must think of the corporation as if it were a separate person from yourself. The corporation files a tax return separately from its shareholders. Therefore it may not be the best choice for a small business. But forming a corporation will be a necessity if you plan on growing your business with hopes of going public. So to some extent the expected size of the business and your future plans for the business determine whether forming a corporation should be considered, as well as when it should be considered.

• Limited Liability Company

This may be a good choice for many small businesses if you have concerns over your personal liabity for debts and liabilities incurred by the business, but are not prepared to start a corporation. Instead of shareholders, LLC's have "members" which may be individuals, partnerships, limited partnerships, trusts, estates, associations, corporations, other LLC's or other business entities. While formerly it was an option requiring two or more persons, it is now available in California for single person businesses as well. There are legal requirements but they are less strict than corporate formalities. This is a "pass through" entity, meaning although it is considered a separate legal entity, taxes for the business may be filed through the members of the LLC.

• General Partnership

This is a traditional choice for businesses where two or more people are involved in the business. Like a sole proprietorship, it has no formalities required by law and can be formed on a verbal agreement of the parties. But the partners are jointly and severally liable. This means each partner can be held liable for debts and liabilities incurred by the other partner or partners. So there is a strong element of risk involved and, although not required, a partnership agreement should be drafted to clearly outline rights and responsibilities of the partners. A partnership enjoys the benefit of pass-through taxation.

• Limited Partnership

A limited partnership requires naming a general partner responsible for running the business and the other limited partners receive protection from liabilities and debts of the business but only to the extent they are not involved in management of the business. There are filings required with the Secretary of State and a limited partnership agreement required.

• Limited Liability Partnership

Limited liability partnerships are entities that engage in the practice of public accountancy, the practice of law or the practice of architecture. A limited liability partnership must have two or more licensed partners.

• S Corporation

This is the common term for a Sub-chapter S Election by a Small Business Corporation under section 1362 of the Internal Revenue Code.

• Other Business Forms

Other options for forming a business may be available, for example, in regards to forming non-profit and charitable organizations. - Please remember, there are numerous factors to consider in forming a business, based on the type of business, the intentions of the parties involved, and the available state and federal laws. Keep in mind that the information on this page is very "bare bones" and is intended only to outline a few of the basics a person might consider in deciding how to proceed in forming a business.

Want to find out what a legal term means ? Try this dictionary.

Please contact the Law Offices of Bonnie Follett
if you need more specific information.