Legal

Do You Need a Business Entity?

Legal

First, let’s get real. Sole proprietorships and general or limited partnerships are not business entities in and of themselves.  Also, a “dba” or fictitious business name is not a business entity either.  These are ways of doing business as an individual or group of people without using your actual names as the name of the business.  They do not provide you with one of the biggest benefits that you get from forming a business entity:  limited liability!

What is Limited Liability?

Limited liability arises out of the concept that your business entity is a separate legal “thing” from you.  Think of it as an imaginary new person that you have created, and that you control, but if things ever went south, the entity would take the heat.  This means that if you formed an entity, then if your product makes someone sick or if someone hurts themselves at your store, then they sue the entity, not you as a person.  Your assets and your bank account are protected!  Even if you don’t have significant assets now, having a business entity would protect your personal credit history which can affect your ability to buy a home or a car in the future.

Difference Between LLC and Corporation

Now, let’s narrow down your choices.  While there are quite a few different types of entities to choose from in California, the most common ones are the Limited Liability Company and the Corporation.  Here are a few key points to consider when deciding between the two.

  1. Both provide limited liability protect mentioned above.
  2. Corporations can issue shares of stock. LLCs cannot.  This is one of the main defining characteristics between the two entities.  So if issuing stock to shareholders is something that is important to your business structure, a Corporation might be your best bet.  Corporations are usually more common in industries that value having multiple investors, like tech startups.
  3. Some businesses don’t have much of a choice! Professional service businesses such as lawyers, doctors, therapists, cannot form an LLC.  They have the option of forming a Professional Corporation.
  4. Corporations are required to comply with formalities. LLCs are not.  These formalities can include, among other things, annual meetings and record keeping.
  5. Both Corporations and LLCs allow for one of the owners to withdraw from the business and let the business continue to operate. This is not the case for general partnerships where, if one partner withdraws, it’s possible to trigger full dissolution of the partnership.  Corporations and LLCs on the other hand, will continue on regardless of ownership changes, unless something say otherwise in their governing documents.

Choosing an entity is an important decision to make for your business.  The information provided here is meant to give you a non-exhaustive snapshot of the options out there so you can be better educated when taking that next step for your business.

If you have any questions at all do not hesitate to contact us at Slate Law.

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