3 common misconceptions about business entities in California

On Behalf of | Nov 1, 2023 | Business Law

People love to offer advice when someone says they are about to start a small business. Even those who have never operated a company will often give their two cents about the best options for someone’s entrepreneurial dreams.

Unfortunately, a lot of what people share is wildly inaccurate and could leave someone at more risk than they realize. For example, there are many myths related to business organizations in California. Treating these common misconceptions related to forming business entities in the Golden State as truth may increase someone’s total risk as they work to launch a new company.

Myth: Only successful companies benefit from complex structures

It is quite common for people to assume that sole proprietorships and informal partnerships are sufficient for their own protection unless a company starts doing millions of dollars in business each year. The truth is that registered partnerships and limited liability companies (LLCs), as well as more complex corporate structures, are often useful from the first days of business operations. The sooner that someone takes the time to create a formal business entity, the easier it will be to protect themselves as thoroughly as possible against liability.

Myth: LLCs and corporations provide total liability protection

A surprising number of people wrongfully assume that someone who creates a formal business entity will have total protection from any personal liability related to the company’s debts or a lawsuit brought against the organization. However, LLCs and corporations only serve to limit liability, not to eliminate it. Small mistakes when starting a company could lead to plaintiffs and creditors asking the courts to pierce the corporate veil. They could still potentially hold a business owner personally accountable for issues related to the company.

Myth: How someone starts the business dictates how it operates forever

Some people mistakenly believe that someone who begins operating a company as a sole proprietorship must continue to do so indefinitely or dissolve the company to start over if they want to change its structure. It is actually possible to change the form or type of business that someone runs as the company grows and expands. Doing so is often a challenge, but it is possible with the right support.

Of course, it is usually best to give careful consideration to the type of business that one wants to run and to follow the right business formation process in accordance with that decision. This is just one of the reasons why seeking legal guidance when forming new small business can make a big difference in the future operations of the company in question.