By: Claudia McDowell
As attorneys who advise individuals and businesses, clients often ask our advice on how to structure their new business and the requirements for operating that type of business. Typically, most people want to know the pros and cons of being a sole proprietor, a corporation or a limited liability company. Here is a brief synopsis of the differences between these types of entities:
A sole proprietor is a business that is NOT separate from its owner. You may see sole proprietors referred to as "Doing Business As", "DBAs" or Fictitious Names. In California, to operate under a trade name or fictitious name, the owner must file a fictitious name statement in the county where the business is operating and publish the information concerning the owner of the fictitious name in the local newspaper for a specified period. The business owner remains liable for all debts of the business because the business does not exist separately from its owner. Typically, the income and expenses for a sole proprietor are reported on the owner's Form 1040 each year.
A corporation is a separate legal entity that, if properly maintained and operated, can shield its owners from personal liability for the debts of the corporation. The shareholders own the corporation, but elect directors who then appoint officers (such as the president, secretary and treasurer) to run the business. The corporation is governed by bylaws and can own property in its name. The corporation can be taxed like a corporation and file its own tax returns, or elect to be an S-Corp and pass income and expenses through its shareholders like a partnership, which can avoid taxes being imposed at both the corporate and shareholder level.
Another common type of legal entity is the limited liability company (LLC), which is a cross between a corporation and a partnership. It allows the pass-through of profits and losses to the owners, called members, with the added attraction of limiting the owner's individual liability for the debts of the company, thus adding the protection of a corporation. The LLC is governed by an operating agreement, which sets forth a roadmap by which the LLC will run its business.
There are many different reasons an individual may choose one form of entity over another. We invite you to contact us for a consultation concerning which is best for you and your business.
Claudia J. McDowellis a partner at McDowell Odom LLP, a law firm based in Santa Clarita. For an appointment, please contact (661) 449-9630 or visit www.mcdowellodom.com.