One of the core practice areas of SAC Attorneys LLP is business formation. Clients in Silicon Valley often come to SAC Attorneys LLP with a tremendous amount of excitement around the creation of their new business. But while they may be experts in their area of expertise, they often know little more about business formation than the acronyms that the attorneys at SAC Attorneys LLC all see in their day to day life such as “LLC,” “LLP,” “C-Corp,” and “S-Corp.” It’s important to know that these aren’t inconsequential designations—decisions regarding how you incorporate your business can stimulate or stunt your growth, depending on how it’s handled. A poorly executed business formation today can result in anguish and lost profit tomorrow. In this blog post, we’ll discuss the most basic forms of corporations, sole proprietorships, general proprietorships, and limited partnerships.
Whether your company is just starting up or is ready to step up to the next level of complexity, you need expert counsel to guide you through the incorporation process. The attorneys at SAC Attorneys LLP are positioned to provide you with that counsel, call (408) 436-0789 for your free consultation.
A sole proprietorship is the simplest business entity. Under this entity form, one person owns and completely controls a business. If you launch a new business and are the only owner, you are automatically a sole proprietorship under the law. There’s no need to register a sole proprietorship with the state, though you might need a business permit from your local municipality. The attorneys at SAC Attorneys LLC most frequently sees freelancers, consultants, and other individual professionals working as sole proprietors, but it’s also a viable option for more established businesses with a single owner.
There are several positive aspects to a sole proprietorship. They are easy to create, with no paperwork formalities, and tax filing for a sole proprietorship means only filling out a Schedule C-Profit and Loss from Business along with your personal tax filing.
The negative aspects of a sole proprietorship can be significant. First and foremost, the individual who is the sole proprietor is personally liable for all of the business’s debts and liabilities. That means if the company is sued, your personal assets (i.e. your home, savings, and car) can be taken to pay the suit. In essence, the business is part of the individual owner, and the individual is liable for any problem the company may run into. Accordingly, a sole proprietorship is not advisable for any enterprise that may result in significant liability.
Partnerships are very similar to a sole proprietorship; obviously, a key difference is that the entity has two or more owners. There are two types of partnerships: general partnerships (GPs) and limited partnerships (LPs). All partners actively manage the business and share in the profits and losses in a general partnership.
Like a sole proprietorship, one of the primary advantages to a GP is that they are easy to create, with very little paperwork. Business losses can be deducted from the owners’ personal tax returns.
However, also like a sole proprietorship, a GP leaves its owners personally exposed to any liability. That becomes more complex in a GP, where each owner becomes liable for the others’ negligence. Thus, your potential liability is compounded in a GP based on the number of other owners. Accordingly, in a low liability business created by close, trusted co-owners, a GP may be the appropriate entity. But if there is any degree of liability or complexity involved, this entity type should probably be avoided.
Unlike a sole proprietorship and a GP, an LP is a business entity registered with the state. In an LP, partners come in two types: those who own, operate and assume liability for the business (general partners), and those who act only as investors (limited partners, sometimes called “silent partners”). General partners control the business and assume the liability that comes with that control. Limited partners have no control over the operation of the business. As a result, they have fewer liabilities. They typically act as investors in the business and also pay fewer taxes because they have a more tangential role in the company.
A LP is a favored option for those businesses trying to build on the backs of investors. In this model, investors can invest without accruing personal liability. The general partners retain control of the business but maintain control over business decisions. Finally, the limited partners can come and go without affecting the partnership.
For the general partners, there is still personal liability for business decisions and the decisions of the other general partners. This remains a significant risk. While this is an attractive model for limited partners, they too can become liable if they take any active role in the company’s management.
What is the right entity formation for your business? If you are forming a new business, you need expert guidance to make sure that you are choosing the enterprise structure that will suit you best today and tomorrow.
For a free initial consultation, contact SAC Attorneys LLP today at (408) 436-0789. Based in San Jose, California, SAC Attorneys LLC is prepared to represent clients in Mountain View, Los Gatos, Cupertino, Fremont, Palo Alto, Santa Clara County, Silicon Valley, and around the world.