If you have decided to start a new business, you’ll want to carefully consider the benefits and potential drawbacks of different company structures before committing to one over the others. The decision to form your business in one way or another will affect your company’s future in numerous, consequential ways, so it is important to be thoughtful when weighing your options.
As you consider each potential structure, ask yourself how you want your business to operate and what your long-term goals for your company are. These answers will help to guide you in the right direction for your unique vision.
New California business owners have four primary formation structures to choose from. Each suits different company types and business goals in distinct ways. Some companies would obviously benefit from being structured in a single, specific way and others could potentially be structured in a variety of ways.
The four primary business formation options available to you are:
- Sole proprietorship (owned by a single individual). This option offers maximum flexibility, easy start up and control and no meaningful reporting requirements. You’ll be taxed on your personal return and will not benefit from personal liability protection.
- Partnership (owned by at least two individuals or entities). This option functions much like a sole proprietorship, although you may need to observe some reporting requirements and may benefit from minimal personal liability protection.
- Limited Liability Company (owned by one or more members). This option serves as a middle ground between the first two options and a corporation. The management structure is relatively flexible and this structure can be taxed either as a distinct entity or on the returns of members. There are some reporting requirements and this structure benefits from personal liability protection.
- Corporations (owned by shareholders). This option features a rigid management structure and is taxed as a distinct entity. It is subject to rigorous reporting requirements and offers maximum personal liability protection.
Taking time to consider how any given business structure will or will not suit your vision for your new company will help you to make informed choices about the options that are available to you. As this formation decision is truly consequential, it’s important not to rush to a conclusion before you have considered every option in turn.