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Choosing your business entity type

You're going to take the plunge and start that business you've always dreamed of owning.

However, it isn't as easy as just renting a space for your office or shop and getting your business cards printed. When you decide to form a business, you must figure out the type of business entity you will have.

You have several choices that will impact everything from your taxes and liabilities to your personnel needs. Here's a brief look at the types of businesses available to you in California.

  1. Corporation. In California, a corporation operates separately from the owners. Company owners are limited from personal liability, and both the corporation and shareholders will pay taxes. Stocks and bonds can be sold.
  2. Limited liability company (LLC). An LLC offers similar liability protection to a corporation but has a different tax structure. One or more managers, or one or more members, may manage an LLC.
  3. Limited partnership. This can provide limited liability for some partners. The business must have at least one general partner and a limited partner. General partners mostly have unlimited personal liability.
  4. General partnership. In a California general partnership, there must be at least two people involved in the business to make a profit. All partners are jointly liable for the obligations of the business, and any profits are taxed as personal income.
  5. Limited liability partnership (LLP). An LLP is limited to certain professional services, such as architecture, law or accountancy. An LLP must maintain insurance as the law requires.
  6. Sole proprietorship. This is just as it sounds: a single person who owns and operates the business. The owner receives all profits and is responsible for all taxes and liabilities. If the business name uses something other than the proprietor's name, a fictitious business name statement must be filed in the county where the business is located.

Before starting a business in California, you should consult with an attorney experienced in the field to determine your business entity type and seek help with the paperwork filing. The decision you make about what type of entity the business will be will have a lasting impact on your legal obligations.

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