Once you decide to establish a business, a primary consideration is the type of business entity to form. Tax and liability issues, director and ownership concerns, as well as state and federal obligations pertaining to the type of entity should be considered when making your determination. Personal needs and the needs of your particular type of business should also be considered.
Limited Liability Company (LLC)
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Contracts
There are many different types of contracts that a business may need. On the one hand, the small start up operation does not want to drown in legal bills, but on the other hand it is advisable to practice preventative law. Simply stated, a well drawn contract can avoid thousand of dollars in litigation expenses.
Licences
For information regarding licensing requirements applicable to your type of business, please refer to http://www.calgold.ca.gov website. The online CalGOLD database provides links and contact information to agencies that administer and issue business permits, licenses and registration.
A sole proprietorship is set up to allow an individual to own and operate a business by him/herself. A sole proprietor has total control, receives all profits from and is responsible for taxes and liabilities of the business.
If a sole proprietorship is formed with a name other than the individual's name (example: John Smiths Fishing Shop), a Fictitious Business Name Statement must be filed with the county where the principal place of business is located. To determine the applicable county agency where fictitious business names are filed, please refer to the list of California counties provided on the California State Associations of Counties website.
No formation documents are required to be filed with the Secretary of State. Other state filings may be required depending on the type of business.
- The cost to start a sole proprietorship is inexpensive.
- A separate bank account should be established to run the operations.
- The owner of the sole proprietorship controls all facets of the business.
Key Features
The business and the owner are one. There is no separate legal entity and thus no separate legal person
The sole proprietor is personally liable for all debts and actions of the company.
The life of the business continues to exist as long as the business owner is alive. Once the owner dies, the sole proprietorship no longer exits.
Purchasing insurance to cover the risks of running your business is advisable. Consider consulting an insurance specialist on the matter.
Report your business income and expenses on Federal Form Schedule C. This form is included with your California personal income tax return (CA Form 540).
The return due date is normally April 15th for calendar year taxpayers.
The tax rate depends on the proprietor’s total taxable income.
Taxation
A sole proprietorship will include all sources of income (e.g., wage income, investment income) when determining estimated tax payments.
Installments are due and payable on April 15th, June 15th, September 15th of the taxable year and January 15th of the following taxable year.
Individuals complete Form 540-ES to report their estimated taxes.
Generally, estimated tax payments are required if you expect to owe at least $200 ($100 if married filing separately) in taxes for the current year (after subtracting withholding and credits) and you expect your withholding and credits to be less than the smaller of:
- 90 percent of the tax on your current tax return or
- The tax listed on your prior year tax return including Alternative Minimum Tax.
Understanding the Operation of Corporations
C Corporations
S Corporations
Frequently Asked Questions
Who are the Directors & Officers of a corporation?
Understanding The Operations Of Corporations
A corporation is a fictitious person in law. A corporation is like a person without eyes, ears, hands, or intelligence. It also does not have money to start the business. So it needs real people to fund it, to guide it and work for it.
STOCKHOLDERS OR SHAREHOLDERS
The corporation will need capital (money) to start off. In order to get money for its business, the corporation needs people to give it money in return for a share of its profits. In other words, the more shares you have in a corporation, the greater your share of any profits made by the corporation. These people become stockholders also known as shareholders.
For example: If “A” and “B” decide to form a company they can arrange that the corporation will sell 1,000 shares where each share is valued at $10. If “A” and “B” each contribute $5,000 to the corporation, the corporation will have $10,000 to start its business and “A” and “B” will be 50% shareholders in the corporation with each one of them owning 500 shares.
If the stock in the corporation is sold ten years down the line and the corporation is an extremely successful business then each share will be valued by its worth at that time.
If the corporation fails then each shareholders liability is limited to the amount of money that they paid for their shares, which in this case would be their initial investment of $5,000.
This would be the ideal situation for a shareholder. It would provide total protection for all of the shareholder’s other assets, but there is a reality.
The Reality of Limited Liability
Modern commerce often results in a different situation.
Banks will not lend the corporation money, unless it receives guarantees from the shareholders/directors in small corporations.
A landlord will not lease space to a small corporation, unless the rental and other obligations under the lease are guaranteed by the shareholders/directors.
Most suppliers will not sell merchandise to the corporation, unless guarantees are provided by the shareholders/directors.
There is still limited liability for instances where people dealing with the corporation have not requested guarantees and in many cases liability is limited for torts. So if someone gets hurt from a corporate product the directors and shareholders could be protected from personal liability, provided they had no knowledge that the product was dangerous and they directed the corporation to have adequate product insurance liability.
The Rules of the Corporation (By-laws)
The bylaws can deal with many issues, ranging from the number of directors on the Board of Directors to what procedure must be followed if someone wants to sell their shares.
The Board of Directors will meet as often as the bylaws require e.g. once a month, once every second month, or once a quarter. At the first meeting of directors after the shareholders meeting that elects directors, the officers of the corporation are chosen.
Limited Liability
Limited liability is one of the main reasons why people choose to incorporate their businesses.
Below is a discussion on Corporations, but you should also check out the information on Limited Liability Companies on this web site. There you will find a comparison between Corporations and LLCs.
There are two types of Corporations:
C Corporations; and
S Corporations
A C corporation is a separate legal entity owned by shareholders. C corporations are taxed annually on their earnings and the shareholders are taxed on these earnings when distributed as dividends.
Key Features
A corporation must register with the California Secretary of State before conducting business operations and file appropriate paperwork.
A corporation must create bylaws (e.g., how the corporation will operate) that cover items such as stockholder meetings, director meetings, number of officers, and their responsibilities.
Based on the corporation’s separate legal entity status, the owners of the corporation are not liable for the losses of the businesses and creditors may only look to the corporation and the business assets for payment.
A separate bank account and separate records are required with this form of entity.
The owners have ultimate control of the corporation; but must elect directors who in turn elect officers for the company. The directors make the major decisions, while the officers make the day-to-day decisions.
A corporation’s life is perpetual in nature.
Ownership is easily transferred through the sale of stock and new owners can be easily added by the issuance of additional stock.
This form of ownership is more costly to set up and maintain than a sole proprietorship or partnership. Consult an attorney for guidance on setting up your corporate entity.
TAXATION
Corporations that organize in California, register in California, conduct business in California, or receive California source income, must file California Form 100.
The return due date is the 15th day of the third month after the close of the taxable year.
A Corporation is taxed on its net income at a rate of 8.84 percent, with a minimum tax of $800.
The minimum franchise tax ($800) is due the first quarter of each accounting period and must be paid whether the corporation is active, inactive, operates at a loss, or files a return for a short period of less than 12 months. The minimum tax is waived on newly formed or qualified corporations filing an initial return for their first taxable year.
Estimated Tax
The estimated tax is payable in four installments.
Installments are due and payable on April 15th, June 15th, September 15th, and December 15th.
Corporations complete Form 100-ES to report their estimated taxes.
The amount of each installment is 25 percent of the total estimated tax due (estimated income multiplied by the appropriate tax rate).
An S corporation is a hybrid business entity. It is a separate legal entity and generally offers liability protection to its owners (shareholders).
Key Features
An S corporation must register with the California Secretary of State before conducting business operations and file appropriate paperwork.
An S corporation must create bylaws (e.g., how the corporation will operate) that cover items such as stockholder meetings, director meetings, number of officers, and their responsibilities.
A corporation must elect to be treated as an S corporation and is limited to 100 owners (shareholders).
The S corporation pays a reduced tax rate on its net income (currently 1.5 percent for California) and is a conduit similar to a partnership.
The profits and losses "flow down" from the S corporation to each shareholder through the Schedule K-1. Each shareholder is responsible for paying taxes on their distributive share.
Based on the corporation’s separate legal entity status, the owners of the corporation are not liable for the losses of the business and creditors may only look to the corporation and their business assets for payment.
A separate bank account and separate records are required with this form of entity.
The owners have ultimate control of the corporation; but must elect directors who in turn elect officers for the company. The directors make the major decisions, while the officers make the day-to-day decisions.
An S corporation’s life is perpetual in nature.
TAXATION
S corporations that organize in California, register in California, conduct business in California, or receive California source income, must file California Form 100S.
The S corporation must provide each shareholder with a schedule K-1 that states the shareholder’s allocation of tax items.
The return due date is the 15th day of the third month after the close of the taxable year.
An S corporation is taxed on its net income at a rate of 1.5 percent, with a minimum tax of $800.
Estimated Tax
The estimated tax is payable in four installments.
Installments are due and payable on April 15th, June 15th, September 15th, and December 15th.
Corporations complete Form 100-ES to report their estimated taxes.
The amount of each installment is 25 percent of the total estimated tax due (estimated income multiplied by the appropriate tax rate).
Does the Secretary of State license corporations?
The Secretary of State does not issue licenses to corporations or to any other type of business entity. For information regarding licensing requirements applicable to your type of business, please refer to http://www.calgold.ca.gov website. The online CalGOLD database provides links and contact information to agencies that administer and issue business permits, licenses and registration
How do I change the name of my corporation?
To change the name of a California corporation, the corporation must file a Certificate of Amendment in compliance with the California Corporations Code. Our website includes instructions and downloadable samples for assistance in preparing and filing a Certificate of Amendment for a Stock (business) Corporation and a Certificate of Amendment for a Nonprofit Corporation.
To change the name of a foreign (out of state or country) corporation, the corporation must file an Amended Statement by Foreign Corporation form pursuant to Corporations Code Section 2107. Attached to the form must be a certificate of an authorized public official of the state or place of incorporation that the name of the corporation has been changed in accordance with the laws of that state or place. (Note, the certificate must set forth both the old and new name.)
How do I dissolve (withdraw) my corporation?
California Stock Corporations: To formally dissolve, the corporation must file with the Secretary of State a Certificate of Election to Windup and dissolve prior to or together with a Certificate of Dissolution. However, if the election to dissolve is made by the vote of all the outstanding shares, only the Certificate of Dissolution is required.
California Nonprofit Corporations: To formally dissolve, the corporation must file with the Secretary of State a Certificate of election to Wind Up and Dissolve prior to or together with a Certificate of Dissolution. However, if the election to dissolve is made by the vote of all the members, or if the corporation has no members, by the vote of all the directors, only the Certificate of Dissolution is required. The forms, along with filing instructions, can be downloaded from our website or mailed to you upon request. Note: Forms ELEC NP and DISS NP were created for ease in filing; however, any format may be used provided it meets statutory requirements.
Additional requirement: If the dissolving corporation is a nonprofit public benefit or religious corporation, the Certificate of Dissolution must also be accompanied by a letter issued by the Attorney General that either waives objections to the distribution of the corporation's assets pursuant to Corporations Code section 6716(c) or confirms that the corporation has no assets. A written request for the required letter can be mailed to the Office of the Attorney General - Registrar of Charitable Trusts at P.O. Box 903447, Sacramento, California 94203-4470. Questions regarding the issuance of the required letter must be directed to the Office of the Attorney General - Registrar of Charitable Trusts at (916) 445-2021.
Qualified Foreign (out of state or country) Corporations: To surrender (withdraw) the corporation's right to transact business in the state of California, the corporation must file with the Secretary of State a Certificate of Surrender of Right to Transact Business form.
Are corporate bylaws filed with the Secretary of State?
Corporate bylaws are not filed with the Secretary of State. Bylaws are kept at the corporation's principal executive office (if located in this state) or the corporation's principal business office in this state. The bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside this state and the corporation has no principal business office in this state, it shall, upon the written request of any shareholder, furnish to such shareholder a copy of the bylaws as amended to date.
Do I have to register (qualify) my out of state (or country) corporation in California?
A foreign (out of state or country) corporation transacting intrastate business in the State of California must qualify to do so with the Secretary of State's office. "Transacting intrastate business" is defined as entering into repeated and successive transactions of a corporation's business in this state, other than interstate or foreign commerce. See California Corporations Code section 191.
What is an agent for service of process?
An agent is an individual (director, officer or any other person, whether or not affiliated with the corporation) who resides in California or another corporation designated by the corporation to accept service of process if the corporation is sued. The agent must agree to accept service of process on behalf of the corporation prior to designation.
If another corporation is designated as agent, that corporation must have previously filed with the Secretary of State a certificate pursuant to Corporations Code section 1505. Note, a corporation cannot act as its own agent and no domestic or foreign corporation may file pursuant to section 1505 unless the corporation is currently authorized to engage in business in California and is in good standing on the records of the Secretary of State.
How do I change the name and/or address of the agent for service of process?
To change the name and address of the corporation's agent for service of process, the corporation must file a statement in compliance with California Corporations Code section 1502 for stock corporations, sections 6210, 8210, or 9660 for nonprofit corporations, and section 2117 for foreign corporations.
Do I obtain my corporate seal from the Secretary of State?
The Secretary of State does not issue corporate seals. Corporate seals may be obtained by the corporation directly from an office supply or stationery company.
Who Are The Directors & Officers Of A Corporation?
Who are Directors?
In small companies the shareholders and directors are often the same people. The difference between a shareholder and a director is that a shareholder owns stock in a company, but cannot tell the company how to run its business.
It is the directors who direct the direction of the corporation. Directors make the policy decisions, which are then carried out by the management of the corporation. A shareholder who has substantial shares in a corporation can vote himself or herself in as a director or nominate someone to be a director.
Shareholder meetings are usually held once a year where the directors of the corporation are elected by the shareholders.
Invariably in small corporations with a few shareholders, all the shareholders are also directors.
The officers of the corporation are those people who are entrusted with major legal executive positions.
1. The President or Chief Executive Officer
The President steers the corporation in the direction that the Board of Directors have directed. The President ensures that everything is done so that the corporation can achieve the objective set out by the Board of Directors. The President is the supreme general manager. The President is the captain of the ship.
2. The Secretary
The Secretary is involved in maintaining all the corporate records of the corporation. The secretary will ensure that the stock ledger and stocks are correctly recorded and that the minutes of meetings correctly reflect the decisions of the Board of Directors.
3. The Treasurer
The Treasurer is responsible for the finances of the corporation and to ensure that tax returns and other financial documentation is correctly filed on time and with the proper authorities.
Loans To The Corporation
Since a corporation is an entirely different person in law top it’s shareholders, it is possible for the shareholders or others to lend it money.
If the structure of your business is a sole proprietorship or a partnership, it is impossible to lend yourself money. If you start doing deals with yourself, like lending yourself money, you are looking to get locked up.
Loans to the corporation may come from two sources:
- Outsiders – These are people who do not have a share in the corporation. For example banks, parents who are assisting children, friends, relatives, and other sources.
- Insiders – If a shareholder lends the corporation money, then when the money is repaid to the shareholder, only the interest is taxed, not the full amount of the loan that is repaid.
Smart shareholders make most of their contribution to the financing of the corporation by way of loans and as little as possible by purchasing shares. Remember that the price paid by shareholders for shares is not returned to the shareholder, unless the shareholder sells the shares. On the other hand, loans to the corporation can be repaid when the corporation makes profit and the repayment is not a taxable dividend but merely a repayment of the loan.
The Internal Revenue service allows loans within reason by shareholders. There are no firm regulations regarding the ratio between the amount used for purchasing shares and the amount of money that can be loaned to the corporation.
Also, many states require that the corporations must have sufficient share capital for its general needs.
In some jurisdictions in the world, you can pay $1.00 for your share and loan the corporation $99,999.00.
In California, you must capitalize the company with the amount it needs to operate, and then you can loan additional money to the corporation.
A domestic limited liability company generally offers liability protection similar to that of a corporation but is taxed differently.
Domestic limited liability companies may be managed by one or more managers or one or more members. In addition to filing the applicable documents with the Secretary of State, an operating agreement among the members as to the affairs of the limited liability company and the conduct of its business is required.
The limited liability company does not file the operating agreement with the Secretary of State but maintains it at the office where the limited liability company's records are kept. Professional limited liability companies are restricted in California at this time.
An LLC is a newer form of business entity. It has advantages over both the corporation and the partnership forms of operating a business. The LLC’s main advantage over a general partnership is that, like the owners (shareholders) of a corporation, the owners (members) of an LLC are generally not responsible financially for the debts and obligations incurred in the course of the LLC’s business. In addition, an LLC has the flexibility to be taxed as a partnership, sole proprietorship, or corporation.
For California income tax purposes, an LLC with more than one member will be classified as a partnership, and an LLC with a single individual member will be treated as a sole proprietorship, unless the LLC chooses to be treated as a corporation.
To be taxed as a corporation, the LLC files an election on a form with the Internal Revenue Service. California treats the LLC and its owners for income tax purposes in the same manner the LLC is treated for federal tax purposes.
Key Features
An LLC may have one or more owners, and may have different classes of owners. In addition, an LLC may be owned by any combination of individuals or business entities. An LLC, therefore, is more flexible than an S-corporation with regards to types and numbers of owners.
An LLC is treated as a legal entity separate from its owners, similar to how a corporation is treated, regardless of how the LLC is classified for tax purposes.
In general, the owners (members) are shielded from individual liability for debts and obligations of the LLC.
An LLC is formed by filing "articles of organization" with the California Secretary of State prior to conducting business.
Forming an LLC is simpler and faster than forming and maintaining a corporation.
LLCs do not issue stock, and are not required to hold annual meetings or keep written minutes, which a corporation must take in order to preserve the liability shield for its owners.
Either before or after filing its articles of organization, the LLC members must enter into a verbal or written operating agreement. A formal, written agreement is advisable.
An LLC is typically managed by its members, unless the members agree to have a manager manage the LLC’s business affairs.
Generally, members of an LLC that are taxed as a partnership may agree to share the profits and losses in any manner. Members of an LLC classified as a corporation receive profits and losses in the same manner as shareholders of a corporation legally organized as such.
An LLC’s life is perpetual in nature. However, the members may agree in the articles of organization or the operating agreement to a date or event that will cause the LLC to terminate. In addition, members of the LLC may vote at any time to end the business operations of the LLC.
What is the difference between a limited liability company and and S corporations?
LLCs and S corporations have only two things in common. They are both pass-through tax entities and therefore avoid double taxation, and they both offer their owners limited liability protection. You may want to consider their many differences along with your business needs before deciding which to file as.
LLCs have more freedom than S corporations in the kinds of owners who are allowed ownership in the entity. In the LLC, ownership rights are not limited. LLCs can enjoy non-US residents as owners, while S Corporations are limited to US residents. One person can have all the shares in an S Corporation, while many states require at least two members for LLCs.
When dealing with stock, LLCs can have many different classes of interest and the percentage of ownership does not necessarily dictate the percentage of pass-through shares each shareholder gets. In S corporations, the percentage of pass-through interest is determined by the percentage of ownership.
The stock in S corporations is freely transferable which means that a shareholder does not need the permission of the other shareholders to sell his stock. The members of an LLC would need the approval of the other members, if they wished to sell their interest, or ownership.
TAXATION
All LLCs classified as corporations that organize in California, register in California, conduct business in California, or receive California source income, must file California Form 100. The California Form 100 must be filed by the 15th day of the third month after the close of the LLC’s taxable year.
The LLC will be taxed at the corporate tax rate of 8.84 percent and will be subject to a minimum tax of $800.
All LLCs classified as partnerships or disregarded entities that organize in California, register in California, or conduct business in California, must file California Form 568 Limited Liability Company Return of Income. California Form 568 must be filed by the 15th day of the fourth month after the close of the LLC’s taxable year.
An LLC required to file Form 568 pays an annual tax of $800, and may be subject to a fee based on the LLC's total income from all sources derived from or attributable to the state of California. The annual tax is due by the 15th day of the fourth month of the taxable year, and is paid using CA Form 3522.
In addition, an LLC filing Form 568 that has members that are not residents of California must file the agreements of those non-resident members acknowledging that California may tax them and may collect tax from them, agreeing to file a California return and pay tax on the members’ share of California source income of the LLC. For any non-residents that do not sign an agreement, the LLC must pay tax on the nonresidents’ share of LLC income.
Estimated Tax
If the Limited Liability Company is classified as a corporation and files California Form 100, the following estimated tax guidelines apply.
The estimated tax is payable in four installments.
Installments are due and payable on April 15th, June 15th, September 15th, and December 15th.
Corporations complete Form 100-ES to report their estimated taxes.
The amount of each installment is 25 percent of the total estimated tax due (estimated income multiplied by the appropriate tax rate).
Frequently Asked Questions
What is the difference between a limited liability company and a limited liability partnership?
A limited liability company consists of one or more members which may be individuals, partnerships, limited partnerships, trusts, estates, associations, corporations, other limited liability companies or other business entities. The members of a limited liability company are afforded limited liability similar to shareholders of a corporation and have pass-through taxes comparable to a partnership.
A limited liability partnership must have two or more partners whose type of business is to engage in the practice of public accountancy, the practice of law or the practice of architecture.
What is the difference between a limited liability company and a limited liability partnership?
A limited liability company consists of one or more members which may be individuals, partnerships, limited partnerships, trusts, estates, associations, corporations, other limited liability companies or other business entities. The members of a limited liability company are afforded limited liability similar to shareholders of a corporation and have pass-through taxes comparable to a partnership.
A limited liability partnership must have two or more partners whose type of business is to engage in the practice of public accountancy, the practice of law or the practice of architecture.
What is the difference between a limited liability company and a limited partnership?
A limited partnership consists of at least one general partner and one limited partner. The general partner is potentially liable for all the obligations of the partnership. The limited partner has limited liability. Limited partners may jeopardize their limited liability status if they actively participate in the business of the partnership.
A limited liability company consists of one or more members which may be individuals, partnerships, limited partnerships, trusts, estates, associations, corporations, other limited liability companies or other business entities. The members of a limited liability company are afforded limited liability similar to shareholders of a corporation and have pass-through taxes comparable to a partnership.
What do I have to do to form a limited liability company? What are the advantages?
A domestic limited liability company must complete and file Articles of Organization with the Secretary of State and pay the fee.
A foreign limited liability company must complete and file an Application for Registration with the Secretary of State. A certificate of good standing from the home state must accompany the Application for Registration and payment of the fee.
Every limited liability company which is doing business in California or has filed Articles of Organization or an Application for Registration with the Secretary of State's Office is subject to the annual limited liability tax of $800. The tax must be paid for each taxable year until a Certificate of Cancellation is filed. Questions regarding franchise tax requirements must be directed to theFranchise Tax Board.
The advantages of forming a limited liability company are that the members are afforded limited liability and have pass-through taxes similar to a partnership.
Do I send the $800 minimum tax to the Secretary of State or to the Franchise Tax Board?
The $800 minimum tax is due directly to the Franchise Tax Board. Questions regarding franchise tax requirements must be directed to the Franchise Tax Board.
Does California recognize single member limited liability companies?
As of January 1, 2000, single member limited liability companies may be formed in California.
What is an agent for service of process?
An agent is an individual (manager, member or any other person, whether or not affiliated with the company) who resides in California or a corporation designated by the limited liability company to accept service of process if the company is sued. The agent must agree to accept service of process on behalf of the company prior to designation.
If a corporation is designated as agent, that corporation must have previously filed with the Secretary of State a certificate pursuant to Corporations Codesection 1505. Note, a limited liability company cannot act as its own agent and no domestic or foreign corporation may file pursuant to section 1505 unless the corporation is currently authorized to engage in business in California and is in good standing on the records of the Secretary of State.
How do I cancel my limited liability company?
A domestic limited liability company must file a Certificate of Dissolution (Form LLC-3) and a Certificate of Cancellation (Form LLC-4/7), unless all the members vote to dissolve, in which case only the Certificate of Cancellation is required; OR, in limited circumstances, a Short Form Certificate of Cancellation (Form LLC-4/8) may be filed. In addition, certain franchise tax requirements must be met.
A registered foreign limited liability company must file a Certificate of Cancellation (Form LLC-4/7). In addition, certain franchise tax requirements must be met.
A partnership involves two or more persons carrying on a business for profit. The business is not a separately taxed entity, but rather, a conduit where the profit or losses of the partnership flow through to the partners. There are two basic types of partnerships (e.g., general partnership and limited partnership).
A general partnership involves two or more persons that agree to create a business and to jointly own the assets, profits, and losses. All of the partners share equal rights and responsibilities in managing the business. In addition, each general partner assumes full personal liability for the debts and obligations of the partnership.
A limited partnership involves two or more persons that agree to create a business. A limited partnership has at least one general partner and at least one limited partner. The general partner is responsible for managing the business affairs, while the limited partner typically provides capital to the partnership. Similar to the general partnership, each general partner assumes full personal liability for the debts and obligations of the partnership. The limited partner’s liability is tied to their investment in the business.
Key Features
A partnership is a flexible form of business and relatively easy to set up.
The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.
A separate bank account should be established to run the operations.
A partnership allows more than one owner, unlike a sole proprietorship.
The cost to form a partnership is generally less expensive than forming a corporation.
The profits and losses "flow down" from the partnership to the individual partners through the Schedule K-1. Each partner is responsible for paying taxes on their distributive share.
In a general partnership, each partner is personally liable for all business debts and lawsuits.
A partnership exists as long as the partners agree it will and as long as all of the general partners remain in the partnership.
TAXATION
Every partnership that engages in a trade or business in California or earns income from California sources and every limited partnership that registers with the California Secretary of State is required to file California Form 565.
The partnership provides each partner with a schedule K-1 that states the partner’s allocation of tax items.
The return due date is the 15th day of the fourth month after the close of the taxable year.
A limited partnership pays an annual tax of $800.
Estimated Tax
No estimated tax requirements.
A general partnership (Statement of Partnership Authority) must have two or more persons engaged in a business for profit.
Except as otherwise provided by law, all partners are liable jointly and severally for all obligations of the partnership unless agreed by the claimant. Profits are taxed as personal income for the partners. Filing at the state level is optional.
General partnerships may record their partnership agreement at the county level at the County Recorders office in the county where the general partnership is located. They may also register with the State at the Secretary of State's Office. The filing of general partnerships is permissive. The fee for filing a Statement of Partnership Authority with the Secretary of State's Office is $70.00.
Partnership Agreements
The partnership agreement should address how decisions are to be made, how to handle a death or buyout, and how to address disputes. There are numerous points that the agreement should cover.
- How the ownership interest will be shared – If ownership is not shared equally, it is especially important to have this addressed in writing.
- How decisions will be made – Voting rights should be addressed here.
- How to determine the purchase price in the event one partner dies or wishes to retire – Having a neutral third party such as a banker or accountant find an appraiser for the business is one solution.
- How money will be paid in the event that a partner withdraws – Having to pay one lump sum on the spot could create problems with your cash flow. Spreading out the payment over a period of several years could alleviate these kinds of problems. Partners may choose to have life insurance policies over each others lives and the proceeds used to purchase the deceased partner’s share.
An LLP is a form of ownership in which "all" partners receive limited liability protection. The LLP is similar to a general partnership in that all partners can take an active role in managing the day-to-day affairs. However, it has the added benefit of providing the limited liability feature, which is not available to a general partnership. The LLP form of ownership is limited in the state of California to professionals working in the fields of law (attorneys), accountancy, and architects.
Key Features
Designed primarily for specific professional services.
The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.
The profits and losses "flow down" from the partnership to each partner through the Schedule K-1. Each partner is responsible for paying taxes on their distributive share.
The LLP allows each partner to actively participate in management affairs.
The LLP provides limited liability protection to each partner.
A LLP remains in effect based on partners agreeing to a termination date and as long as all of the general partners remain in the partnership.
TAXATION
Every partnership that engages in a trade or business in California or earns income from California sources and every LLP that registers with the California Secretary of State is required to file California Form 565.
The partnership provides each partner with a schedule K-1 that states the partner’s allocation of tax items.
The return due date is the 15th day of the fourth month after the close of the taxable year.
An LLP pays an annual tax of $800.
Estimated Tax
No estimated tax requirements.
A limited liability partnership is a partnership that engages in the practice of public accountancy, the practice of law or the practice of architecture, or services related to accountancy or law. A limited liability partnership is required to maintain certain levels of insurance as required by law.
Frequently Asked Questions
What is the difference between a limited liability company and a limited liability partnership?
Limited liability partnerships are entities that shall engage in the practice of public accountancy, the practice of law or the practice of architecture. A limited liability partnership shall have two or more licensed partners.
Limited Liability Companies consist of one or more members which may be individuals, partnerships, limited partnerships, trusts, estates, associations, corporations, other limited liability companies or other business entities. The members of a limited liability company are afforded limited liability similar to shareholders of a corporation and have pass-through taxes comparable to a partnership.
What do I have to do to form a limited liability partnership?
A registered limited liability partnership or foreign limited liability partnership shall complete and file a Registered Limited Liability Partnership Registration form with the Secretary of State.
Must all partners sign the Registration form?
The Registration must be executed by one or more partners authorized to do so.
What is an agent for service of process?
An agent is an individual (partner or any other person, whether or not affiliated with the partnership) who resides in California or a corporation designated by the limited liability partnership to accept service of process if the partnership is sued. The agent must agree to accept service of process on behalf of the partnership prior to designation. If a corporation is designated as agent, that corporation must have previously filed with the Secretary of State a certificate pursuant to Corporations Code section 1505.
Note, a limited liability partnership cannot act as its own agent and no domestic or foreign corporation may file pursuant to section 1505 unless the corporation is currently authorized to engage in business in California and is in good standing
How do I cancel my limited liability partnership?
The limited liability partnership must complete and file a Notice of Change of Status with the Secretary of State.