Forming and building up a business involves a lot of very practical considerations, and a lot of these considerations are tied up with the legal form the business takes. The type of business entity an entrepreneur chooses to form affects various areas of concern, including taxation, ownership, reporting requirements, and liability.
Sole proprietorship is the simplest form a business can take, since it involves a single individual who owns and operates the business. All profits go to the sole proprietor, who is personally responsible for all taxes, liabilities and other debts. It isn’t necessary to file any formation documents with the state, though there can be some required filings depending on the type of business.
Partnership is another relatively simple business form. Partnerships can be either general or limited, the difference being that the former involves two or more individuals who jointly and severally share all debts and liabilities, while the latter arrangement involves some partners who have limited liability. In a partnership, the amount of control and the distribution of profits can be modified by contract. Yet another option within the partnership umbrella is limited liability partnership, in which individual partners pay taxes on their share of distributions, have personal protection from the liabilities of other partners, and retain the right to participate in management of the business.
Because forming sole proprietorships and partnerships is relatively simple, dissolution of these business forms is generally relatively simple compared to more complex business forms like corporations and limited liability companies. In our next post, we’ll look briefly at these business forms and the importance of working with an experienced attorney to handle business disputes when they arise.
California Secretary of State, Starting a Business—Entity Types, Accessed March 22, 2017
State of California Franchise Tax Board, Limited Liability Partnership (LLP), Accessed March 22, 2017