DOING BUSINESS IN CALIFORNIA

Whether to incorporate or to conduct a business in some other form - a sole proprietorship or a partnership- involves many considerations. If you are currently doing business you will have demands on your time of running a business which often prevents you from taking time out to carefully consider your options, assess your situation and plan. Even if you are not yet in business, but planning to start a new enterprise, do not rush into business without first deciding on the best form of organization. Many factors decide the form of organization. Some of the more important considerations in determining what type of business entity you wish to use include:

Liability and personal exposure, costs, including filing fees and tax considerations, the available methods of raising capital, and the ability to attract and keep key personnel through various fringe benefits or participations such as stock options.

The three basic forms of business entity are

                         1) individual or sole proprietorship, 

                         2) Partnership, and 

                         3) Corporation. 

Each offer unique advantages and disadvantages 

The sole proprietorship is the simplest form of business organization. It is a business that is owned by an individual who is solely responsible for all aspects of the business. The owner is personally responsible for all debts of the business and its owner are thus considered the “same entity”.

The advantages of a sale proprietorship include:

       1. Low start-up costs as legal and filing fee are at a minimum. However, many states and cities require at least a filing with the county clerk especially if a fictitious business name is adopted.

       2. Greatest freedom from regulation and paper work.

       3. Owner is in direct control whit no interference from other owners.

       4. Taxes may be lower than with regular corporations.

The disadvantages include:

      a) Unlimited liability. The proprietor is responsible for the full amount of business debts no matter how incurred, which means that his personal property may be taken to cover debts of the business. This, of course, is a significant disadvantage.

      b) Unstable business life, since the sole owner’s death or illness would terminate the business.

      c)  Difficulty in raising capital and in obtaining long-term financing because you cannot readily sell and ownership interest in the business.

  A partnership is a legal entity that is jointly owned by two or more individuals (although in same cases partners may also be corporations or other entities). As with the sole proprietorship, the owners are personally liable for all debts of the firm unless a especial type of partnership, the limited partnership, is set up. Limited partnership are very complex legal structures, and still must have at least one partner who has unlimited liability. Even partnership agreements for regular partnerships can be quite complex.

The advantages of a partnership include:

• a) Low start-up costs, especially since there usually are fewer filing fees and franchise taxes.
• b) Broader management base than a sole proprietorship and a more flexible management structure than the corporation.
• c) Possible tax advantages, since is avoided the double taxation of corporations, and because income can be taxed at personal income rates. Naturally, the personal income situation of the partners could also make this a disadvantage.
• d) Additional sources of capital and leverage by adding limited and special partners.
• e) The duration of the entity can be limited to a stated time, or can continue indefinitely by amendment.
• The disadvantages of a partnership included:
• a) Unlimited liability of at least one partner and possibly all partners are available to satisfy partnership debts.
• b) The life of a partnership is unstable since changing partners by adding new ones or by death or departure of partners causes the partnership to terminate.
• c) Obtaining large sums of capital is relative difficult as the financing cannot be obtained form the public through a stock offering.
• d) The acts of just one partner, even unauthorized acts in many cases, bind all the partners.
• e) An individual partnership interest cannot be easily sold or transferred.
• f) Most tax supported fringe benefits, such as pension and profit-sharing arrangements available only to corporations, are unavailable to partnership

  A corporation is a business that is formed and authorized by law to act as a single entity, although it maybe owned by one or more persons. It is legally endowed with rights and responsibilities and has a life of its own independent of the owners and operators.

It has been defined by the United States Supreme Court as “an artificial being, invisible, intangible and existing only in contemplation of the law.’ To fully understand the concept of a corporation you must think of it of it as a distinct and independent entity and one separate from its owners.

The advantages of a corporation include.

• a) Limited liability. The owners are not personality liable for debts on obligations of the corporation. They can personally lose only to the extent of their investment in the corporation, with the exception that they can be personally liable for certain types of taxes, such as payroll taxes withheld from the employees pay checks but not pay to the internal Revenue Service and estate tax authorities. If the business fails of loses a lawsuit the general creditors cannot attach the owners’ homes, cars and other personal property. Limited liability is the one major reason so many business are incorporate. 
• b) Capital can be raised more easily that under other forms of ownership. This that not mean, however, that a new corporation can easily sell shares of stock is highly regulate by both federal and estate governments and obtaining bank loans for a fledgling business may be no easier for a mew corporation that for a partnership or proprietorship.
• c)  Ownership is a corporation is more easily transferable and this includes transferring shares to family member is gifts or otherwise as well as selling your interest to some other person; however, in many small corporations it is advisable to put restrictions on transfers or shares especially in the persons owning and working in the business must be able to work closely together. This is generally accomplished by stockholder agreements.
• d) Since the corporation is an independent legal entity it has a life of its own or continuous existence. It does not cease simply because one of the owners dies of wishes to retire.
• e) A corporation has a defined centralized management. Control rests in the board of directors and its powers are exercise through the officers.
• f) Many companies offer discounts to corporations (such as travel).
• g) Retirement funds such as Keogh, defined-contribution plans, money-purchase plans, and others profit-sharing pension and stock potion plans may be more easily set up with a corporation.
• The disadvantages of a corporation include:
• a) Corporations are subject to more governmental regulations than either partnerships or sole proprietorships.
• b) Corporations are the more expensive form of business to organize, although a partnership may be equally expensive.
• c) There is double taxation, since both the corporate entity and the individual owners have to file tax returns. As you will see, this may be avoided with a “Subchapter S” Corporation.
• d) Record keeping requirements can be more extensive with a corporation.
• e) Operating across state lines can be complicated because corporation need to “qualify to do business” in states where they are not incorporated. This is explained later in greater detail.
• f) Ending the corporate existence, an in many cases even changing the structure of the organization, can be more complicate and costly than for partnerships and proprietorships.
• Once you have decided that the corporation is the correct form of organization for your business, you must go through the legal steps required to create your corporation. These steps vary form state to state and vary in complexity. With careful planning most people can easily organize their own corporation without a lawyer, thus saving hundreds of dollars in legal fees.

 The selection of the form organization should be decided with professional assistance. Nevertheless, the prevailing attitude is that a corporation is the preferred form organization since is advantages fart outweigh its disadvantages