Business Entity Formation
Experienced San Jose Business Entity Formation Lawyer Serving San Jose, Santa Clara County, and the San Francisco Bay Area
Any lawyer can form a corporation or other entity, but entrepreneurs are well-advised to hire legal counsel who has extensive experience in this area. There are many types of business entities, among them partnerships, corporations, and limited liability companies (LLC’s), and picking the right entity can be critical. Make the wrong choice, and the consequences can range from annoying to dire. It is important to consult with a skilled San Jose business entity formation lawyer before you decide what type of entity to open. Understanding the advantages and risks of each type is critical.
- If there is one owner, the principal choices are sole proprietorship (which technically is not a type of entity), corporation, or LLC.
- If there is more than one owner, the principal choices are partnership (either a general partnership or a limited partnership), corporation, or LLC.
- For certain professionals, a limited liability partnership (also referred to as a registered limited liability partnership) is available, but that is limited to partnerships engaged in the practice of law, public accountancy, architecture, engineering, or land surveying.
- Yet another type of entity is a business trust, although it is not commonly used in California.
In determining which form of entity to choose, several factors should be considered.
The first factor to consider is limited liability. What this refers to is that, with certain types of entities, the obligation of the owner (or owners) is limited to the money or other property contributed to the business (as well as any money or other property that an owner has committed to contribute to the business in the future).
For an entity that is not a limited liability entity, the owner (or owners) is fully liable for the obligations of the business, even if the owner has not committed to contribute to it in the future. The owners of sole proprietorships and partnerships do not enjoy limited liability for the obligations of the business.
The owners of corporations and LLC’s enjoy limited liability for the obligations of corporation or LLC.
The limited partners in a limited partnership also enjoy limited liability, but each general partner of a limited partnership is fully liable for all the obligations of the limited partnership. For more information about the ins and outs of an LLC formation, contact your San Jose business entity formation attorney.
After the issue of limited liability is resolved, counsel typically next considers the tax aspects of the different forms of business organization, often with the guidance of the client’s accountant.
One of the most significant tax aspects is whether the business is a “flow-through” entity. What this means is that income flows through to the owners of the business for tax purposes, and each owner pays income tax on his share of the business’s income. This avoids (either mostly or entirely) any income tax at the entity level, with the result that the owners of the organization pay tax only once on the income of the business. Of course, an owner must have cash with which to pay the tax on his share of the income, and the ability to withdraw the cash from the business without adverse tax consequences is one of the factors considered by counsel in advising on the correct form of business entity.
If an organization is losing money, “a flow-through” entity allows the owners to deduct the losses of the business on their personal tax returns. Tax law imposes significant limitations on the ability on owners to deduct the losses of the business on their personal tax returns, and the choice of entity can have an important bearing on whether the losses can be used personally. If you have a specific question about tax implications, contact our San Jose business entity formation lawyer.
Not every form of business organization is available for every kind of organization. Because of regulatory restrictions, some organizations can be operated only in corporate or partnership form (or as sole proprietorships). For example, an LLC is not eligible to operate certain kinds of business in California. In other cases, only a corporation is permitted to operate certain types of businesses. These regulatory constraints must be taken into account in choosing the right form of entity.
One of the most popular forms of organization is the S corporation, which is a type of flow-through entity. The tax law imposes restrictions on who is eligible to be a shareholder of an S corporation. For example, individual shareholders must either be U.S. citizens or hold a “green card” (that is, be resident aliens). Generally speaking, corporations and partnerships may not be shareholders of an S corporation. While trusts are generally permitted to be shareholders of an S corporation, some types of trusts will result in increased taxation. Having ineligible shareholders of a corporation will disable the corporation from electing to be an S corporation. If you are unsure if you are eligible for a certain type of entity, speak with an experienced San Jose business entity formation lawyer.
Capital Structure and Allocation of Profit and Loss
Partnerships and LLC’s lend themselves more readily to complicated capital structures, with more flexible sharing of profits and losses, than do corporations. With a sole owner or small group of owners, this is usually not an issue since the capital structures are typically straightforward and not complicated. But the flexibility of capital structure is a problem with S corporations, for they are not permitted to have more than one class of stock. Thus, allocating profit and loss in something other than a straight bottom-line fashion is problematic for corporate entities.
One of the most important issues to owners is control. Control can be more easily and flexibly allocated in a non-corporate form, such as a partnership or LLC. Nonetheless, knowledgeable counsel can achieve much of the desired flexibility in corporate form, though typically the legal fees are higher since the corporate form is less flexible and requires more legal work to achieve the desired flexibility.
Getting Started Right
Contact us today to speak with an experienced business entity formation attorney in San Jose. Richard G. Burt helps entrepreneurs have the assurance of knowing that they have the assistance of experienced counsel in forming a business entity. Call (408) 286-7333 and ask to speak to Janet to get more information to determine whether to hire Mr. Burt, or you can set up a fixed-fee engagement to discuss your particular circumstances. You can also send an email using the form on the contact page.