Valerie K. deMartino
444 West Ocean Blvd., Suite 400, Long Beach, CA  90802
ph: (562) 628-0287     fax: (562) 394-9504    
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"Starting a New Business... in California"
by Valerie K. deMartino

Choosing the form of your new business should be one of your
first priorities.
A business can be operated as a sole proprietorship, a partnership, a joint venture, a limited partnership, a corporation, or limited liability company. The basic differences are outlined below.

A sole proprietorship is a business which is owned by an individual. The individual is the sole owner and is personally liable for all obligations and debts of the business. The sole proprietor may hire employees and may do business under a fictitious business name.

A partnership is an association of two or more people for the purpose of conducting business as co-owners. The partners may be individuals, corporations or other partnerships. Each partner is an owner in common with the others and shares the profits and losses. Each partner is authorized to act on behalf of the partnership and can bind the partnership. Each partner is personally and fully liable for the partnership obligations. No other person can become a partner without the consent of all the existing partners and the death or withdrawal of any partner dissolves the partnership absent an agreement to the contrary. Although a general partnership can be formed without a written agreement, such an agreement can provide significant protection in memorializing the agreement. A general partnership is not taxed as a separate entity, rather each partner's share of profits and losses is declared on their individual tax returns.

A joint venture is merely a general partnership formed for a limited or temporary purpose.

A limited partnership is a partnership with two types of partners. One or more general and one or more limited partners. Limited partners are partners who generally do not participate in the management and control of the business and therefore, are not personally liable for partnership obligations. The limited partner's liability is fixed by the amount of his capital investment. The general partner(s) actively participates in the business and his liability is unlimited. Taxation of limited partners is generally the same as for a general partnership.

A family limited partnership is a limited partnership created to between family members, primarily to shift ownership of assets. Otherwise there is no difference between a family limited partnership and other limited partnerships. Assuming the parent is the original owner of the asset, that parent would be the general partner and the children or other relatives would be the limited partners. The parent retains control of the asset as the general partner and retains the unlimited liability. The children's liability is limited to their interest in the asset. As limited partners, the children have no right to partition the property, which may be reassuring to the parent. One benefit of a family limited partnership is the estate and gift tax savings which can be realized by holding assets in the partnership. If the asset is income producing, income can be shifted to the limited partners without the parent making a gift which may be taxed if over $10,000 per year. Furthermore, in the event of a lawsuit, it is less likely a creditor of one of the partners will go after a fractional share in the asset. Finally, if one of the partners dies, his partnership interest, because it is a fractional interest in the asset, would qualify for a discounted value for purposes of estate tax.

A corporation is a separate legal entity formed by filing Articles of Incorporation with the Secretary of State. A corporation transacts business under the control of its Shareholders (owners), Board of Directors and the officers who the Board appoints. Stock certificates evidencing ownership are issued to shareholders. Absent an agreement amongst the shareholders and subject to securities rules, these certificates may be freely transferred. The limited personal liability of the owners is am important characteristic of corporations. As long as a corporation is adequately capitalized, and corporate formalities are met, the shareholders cannot beheld personally liable for corporation obligations. A corporation is taxed as a separate entity and at a different tax rate than individuals. Corporations can pay salaries, lease cars, and write off other expenses which are benefits to its employees to reduce pre-tax profits.

A limited liability company (LLC) is an association of two or more people for the purpose of conducting business. A limited liability company combines the corporate characteristics of limited liability with the general flexibility and tax treatment of a general partnership. The members of a limited liability company have the option of electing to be taxed as a corporation or as a partnership, depending upon how the business is managed. A limited liability company is formed by filing articles of organization with the secretary of state. As with corporations, certificates evidencing ownership are issued and members vote on corporate action. Most limited liability companies have an operating agreement which sets out the rights of the members and the management and tax structure.

An attorney can advise you on the best form of business for you.

- Helpful Links -

SBA sba.gov
California Dept. of Corporations corp.ca.gov
California Secretary of State ss.ca.gov
IRS irs.ustreas.gov
California Franchise Tax Board ftb.ca.gov
US Patent & Trademark Office uspto.gov
US Copyright Office lcweb.loc.gov/copyright
California State Controller unclaimed property site sco.ca.gov/col/ucp
Other US Government Offices firstgov.com
California Employment Development Department edd.cahwnet.gov
Dept. of Industrial Relations dir.ca.gov
State Board of Equalization boe.ca.gov

LEGAL NOTICE: This site is designed to acquaint you with Valerie deMartino and the services she can offer. It is NOT intended to provide legal advise or create an attorney client relationship. The information on this site is intended for education and discussion only. You should consult a professional about your particular facts, circumstances and goals. Ms. deMartino is licensed to practice law only in the State of California and cannot advise you on the laws of other states. This website is not intended to be advertising and is not intended to solicit anyone desiring representation based upon viewing this website in a state or other jurisdiction where it does not comply with local laws and ethical rules.