Types of Business Formations

Starting a new business can be exciting and scary all at the same time.  Being a small business owner can be financially and personally rewarding.  However, sometimes just getting started can be the biggest hurdle to overcome.  Today I am going to talk a little bit about different business entities that can be used to start and run your own small business.  Many times this process can be complicated and have long lasting implications so talking to an attorney may be necessary.  However, here is a little information to steer you on the right path.

 

            Businesses have different forms that they can take.  These recognized legal business entities all have different characteristics, with advantages and disadvantages.  Some of the more common business entities are sole proprietorships, limited liability companies and corporations. 

 

Sole proprietorship

The business founder and business are essentially one in the same.  Profits and losses and pass directly to the business owner, however a major downfall of this type of business entity is that there is no limited liability. 

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Limited liability company

This is a business entity that does have limited liability.   Meaning as long as all the rules are followed the owner of the business is not personally liable under most circumstances for any liability the business incurs.  Limited liability companies are convenient because they offer limited liability with minimal corporate formalities, which are requirements that need to be to followed by the business.  A major downfall of a limited liability company is that in California, the business is subject a minimum $800 annual tax.  It’s the states cost of doing business tax basically.  Final

 

Corporation

A corporation also has limited liability for its owners, also known as shareholders.  It also is subject to a minimum $800 annual tax, but unlike a limited liability company there are many corporate formalities that must be followed.  This includes among other things, regular meetings and official filings with the state.  The main benefit of a corporation is the flexibility it offers for more complex businesses with its shareholder structure.

 

            I know this was a lot of information and may be hard to understand.  Don’t feel bad.  I hope this basic information will steer you in the right direction and help guide you towards your financial goals and dreams.

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