When you’re starting a new business in California, it may feel like there’s just no end to all the paperwork. After all, you started down this path because you were excited to bring your ideas to life, not to fill out forms and file them with the state. But many of those forms are designed to protect you.
One of the first steps in forming your business is to decide how to structure it. California recognizes seven different business structures, and the one you choose for business will have long-term implications for your taxes and paperwork – as well as your personal liability.
Keep it close, or gain some distance
You can generally divide the different business structures into two categories – those that leave you personally liable for any business debts:
- Sole proprietorship
- General partnership
- Limited partnership
And those that don’t leave you liable:
- Limited liability partnership
- Limited liability company
- C corporation
- S corporation
Furthermore, limited liability partnerships are only available to businesses in certain industries that California requires to maintain adequate levels of insurance. If you’re not in one of those industries, you’ll be choosing between sole proprietorship, a form of partnership or some form of incorporation.
As the sole proprietor of a business, you become personally liable for all aspects of the business – both financial and legal. You also have unlimited liability in a general partnership or as the general partner of a limited partnership. In these cases, you become vulnerable legally for anything that happens at work, and your personal assets could potentially fall prey to business debts.
Incorporating your business means extra paperwork, but it also separates you from your business in some important ways. Your personal assets gain security from business debts, and you raise a shield between your home life and any civil or criminal lawsuits that might be filed against your business. Maybe it seems strange to worry about civil or criminal lawsuits before you’ve even gotten started, but if your business could grow to the point where you have employees or multiple venues, it might be worth incorporating. There’s no easier time than at the beginning.
How do I know which business structure best suits my needs?
It’s possible that you’ll be best served by a simpler business structure, or that you might have a hard time choosing between forming your business as a C corporation or S corporation. Either way, choosing the structure that’s right for your business is an important early step along your path to success.