Business Entities – California Estate Planning

Business Entities

Selecting the appropriate form of business entity is the threshold step in the business planning process that has far reaching impact on the business owner or owners. The various types of business entities are as follows:

  1. Sole Proprietorship
  2. General Partnership
  3. Corporation
  4. S-Corporation
  5. Limited Partnership
  6. Limited Liability Company (“LLC”)
  7. LLC taxed as a disregarded entity
  8. LLC taxed as a partnership
  9. LLC taxed as a corporation
  10. LLC taxed as an S Corporation

The primary factors driving the choice of entity decision are as follows:

  1. Management control and duties
  2. Tax considerations
  3. Ease and cost of formation
  4. Ease and cost of operations
  5. Taxability
  6. Asset Protection
  7. Restrictions on structure and capital
  8. Integration with Estate Plan
  9. Exit planning/Client End-Game

Basically there are six different forms of business entities. The Sole Proprietorship is owned by the individual him or herself and all of the income and expenses are reported on that individual’s personal 1040 tax return under Schedule C or if real estate on Schedule E. The problem with the Sole Proprietorship is that the owner is liable for all of the debts of the Proprietorship. It provides no protection from liability.

The second entity is the General Partnership. A General Partnership also is usually not used except in the cases where the partners are limited liability entities anyway. The General Partnership does not require any state charter, just an agreement either verbally or in writing between the partners with respect to sharing the profits, paying the expenses and dividing up the responsibilities of running the business or the real estate. It is generally also not a good form of doing business because it has no liability protection and can be a real hassle when it comes to estate planning.

The third type of business entity is the Corporation. The Corporation has been in existence for centuries and is a good way of holding title to a business that has operating assets. The Corporation is taxed as a separate entity and the owners of the Corporation are taxed on both salaries and dividends. The Corporation owner transfers its rights to a board of directors to participate in management rights to vote and rights to terminate and rights to information spelled out better.

The fourth form of business is the S-Corporation. The S-Corporation is the same as a regular Corporation as far as state filing law and any other legal matter are concerned. The charter is the same with no notation on it that is an S-Corporation. No one really cares or knows if it is a S-Corporation except the Federal and State taxing authorities. The principal difference between the S-Corporation and a regular Corporation is that the S-Corporation is a regular corporation that has made a tax election to pass corporate income, losses, deductions, and credits through to its shareholders. It is also important to note that only corporations that meet certain criteria may make the S-election.

A Limited Partnership is a state-chartered entity with a general partner and limited partners. The general partner is personally liable for the liabilities of the Limited Partnership whereas the limited partners are not (although a limited partner may lose a financial investment in Limited Partnership). The problem with the Limited Partnership is that you almost always have to form another business entity such as a Corporation or LLC to be the general partner to avoid the personal liability that would otherwise attach to the general partner.

For more information on Business Entities In The State Of California, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (714) 384-6500 today.

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