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Welcome to this video on the Types of Business Organization or Business Ownership in California,

presented by StartingYourBusiness.com.

This video is a part of our series of videos on starting a business in California.

Choosing the way your business is legally organized and structured is a fundamental

step of starting a business and one to start thinking about early because it impacts the

process of naming the business, applying for licenses and permits, and how the business

is taxed.

The business organization is simply the legal framework of an entity that is engaged in

commercial activity.

There are four primary types of business organization that a small business owner will choose from

which include the sole proprietorship, partnership, corporation or LLC.

Each entity has its own set of pros and cons and each has some considerations that may

make one better than another for you and your business.

The considerations include the cost of forming the entity, liability protection, ability

to get investment, tax burden, administrative requirements and the complexity of formation.

It can be a little overwhelming and confusing to pick the perfect entity for your business,

but keep in mind, that the entity you choose today does not have to be a forever decision

as you can change to a different entity later on.

The first entity that we will cover is also the most simple, which is the sole proprietorship.

The sole proprietorship is basically an individual who decides to go into business for themselves.

There is no separate legal entity as the business is tied to an individual, making the business

and the individual the same legally.

Since there is no state filing for the sole proprietorship, a major pro for this entity

is that it is fast, easy and inexpensive to form.

There is no sharing ownership, which means there is no board of directors or shareholders

to be responsible to and the taxation is relatively simple as the profits or losses flow to the

owner's personal tax return.

While there are several upsides to the sole proprietorship there are several downsides

and the biggest is unlimited liability and here's why.

Since the business and the owner are considered the same legally, should the business get

sued, the owner's personal assets are potentially at risk.

The risk of being a sole proprietorship really goes up if the owner has significant personal

assets or has employees who could cause the business to get sued.

There is also limited access to capital.

This just means that unlike the partnership, corporation or LLC, there aren't other people

that you can have invest in the business.

Last, the sole proprietorship has a limited life, so if the owner passes away or decides

to get out of business, that business essentially ceases to exist.

This isn't a major concern for many businesses, but if there are contracts or licenses that

the business relies on, the sole proprietorship may not be the best choice.

Forming a sole proprietorship is pretty simple.

Since there is no official state filing, you can decide to go into business right away

as a sole proprietorship and be in business.

We will cover other details for starting a sole proprietorship in later videos and at

StartingYourBusiness.com that may have to be done like registering a business name and

applying for licenses and tax numbers.

The next entity is the partnership, which is a business owned by two or more individuals.

The partnership is very similar to the sole proprietorship in that there is no legal entity

and the owners have unlimited liability.

The good things about the partnership are that it is easy, fast and inexpensive to set

up with no filing or fees to set up with the state.

There are also more people involved which means there is more talent and funds to put

into the business.

Like the sole proprietorship there are significant downsides with the primary one being unlimited

liability, but this time, if one partner makes a bad business decision, every other partner's

personal assets are at risk, making the partnership riskier than the sole proprietorship.

Another partnership con includes sharing of control.

Since partnerships are usually informal and very little is in writing, disagreements can

occur that can be devastating to the business.

A partnership can also be difficult to get out of, should the remaining partner not be

willing to buy out the departing partner.

Just like the sole proprietorship there is no official filing for a partnership with

the state.

We will cover some of the other possible requirements that a new partnership may need to do in later

videos and at StartingYourBusiness.com.

The corporation is the third of the four business entities and is completely different from

the sole proprietorship or partnership because now we have a legal entity that is separate

from the owners.

While the corporation sounds like it is something for a large business, it is really just a

filing with the California Secretary of State.

Corporations can be owned by a single owner or multiple owners.

The corporation has several pros, especially now that it is a distinct legal entity and

the owner's personal assets are separate from the businesses assets.

While the corporation has this liability protection to protect the owners should the business

get sued, some people confuse liability protection for bankruptcy protection.

While it potentially could protect an owner from a vendor trying to get at assets in the

event of bankruptcy, if the business were to try and get a loan, the bank will typically

require any person owning 20 percent or more of the corporation to provide a personal guarantee

that the individual will pay the loan back.

Another pro is that the corporation has unlimited life which could be useful in situations where

there are key contracts or licenses held by the business as the business can essentially

live forever, provided the owners transfer stock and keep paying the state corporation

fee.

The corporation can also sell shares of the business and raise money to potential investors

instead of relying only on debt like a sole proprietorship or partnership.

There are a few downsides of the corporation which include the cost of formation and increased

administration.

The corporation costs between $100 to form in California in addition to a minimum annual

tax of $800.

In addition, there are a number of administrative duties such as an initial board of directors

meeting, shareholders meeting, taking minutes at the meeting, issuing stock certificates

and writing the bylaws.

There are three ways to form a corporation in California.

One, you can do it yourself.

On the California Secretary of State's website, you will fill out and file the Articles of

Incorporation.

Since there are a number of administrative duties that need to be done right, if you

plan to do it yourself, be sure to do your research before filing.

Second you can hire online companies that specialize with forming business entities.

Startingyourbusiness.com has a list of companies that provide this service.

What's nice with these services is that in addition to making sure all of the legalities

of forming the corporation are covered they also send alerts whenever reports are due,

so you have one less thing to try and remember.

The one-time fees for these services usually start around $50-$150 plus the state fees.

Last you can hire an attorney.

This is going to be the most personalized service, but also the costliest.

You will want to go this route if your assets are substantial or want to work one-on-one

with someone to form the corporation.

Expect to spend a minimum of $500-$1,000 for a simple corporation.

The last entity that we will talk about is the Limited Liability Company or LLC.

Just like the corporation, the LLC is a legal entity that is separate from its owners and

is a filing with the California Secretary of State's office.

LLCs can be owned by a single owner or multiple owners.

The LLC costs $80 to file the Articles of Organization with the Secretary of State,

plus the $800 annual tax.

The LLC shares all of the pros of the corporation like being a separate legal entity, unlimited

life, and raising investment capital, but with the LLC, you don't have to hold meetings,

take minutes, and so on, making the LLC much easier to run than the corporation.

There is one potential downside to the LLC which is that every state has its own set

of LLC laws so if you have a California LLC physically doing business in another state,

the LLC may not be the best entity for your business.

The same three ways to form a corporation in California can be used to form an LLC.

Check StartingYourBusiness.com/california a list with the links.

There is a lot to think about before deciding on the right legal entity that best fits your

personal situation and business needs.

At startingyourbusiness.com/california, we provide a free printable comparison guide

with the pros and cons of each entity to help you compare them all.

If you liked this video on the Types of Business Organization in California, please click to

like it and be sure to watch the others in the starting a business in California series.

The StartingYourBusiness.com website has a lot more information to help you in your entrepreneurial

journey and is a completely free resource for small businesses getting started.

Along with the information on the website, we have experienced business advisors ready

to talk with you to help navigate through this process.

There is no cost or catch to use this service either, so check us out at StartingYourBusiness.com

to help get your business started!

For more infomation >> Types of Business Organization in California - How to Start a Business in California - Duration: 9:41.

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Why is Teaching a Crime? California Denies Blue-Collar Workers Entry to Trade Schools - Duration: 4:12.

Oh give me land, lots of land under starry skies above

Now don't fence me in

Let me ride through the wide open country that I love

Don't fence me in

Let me be by myself in the evening breeze

Listen to the murmur of the cottonwood trees

Send me off forever, but I ask you please

Don't fence me in.

You could read about horseshoeing, and study horse shoeing at a university setting

for twenty years, and not be able to shoe a horse.

You've just got to physically get underneath the horse,

manipulate the feet, play with the tools,

so it's strictly all hands on.

For a thousand years, its just been traditionally handed down, you just learn from grandpa.

You don't learn in a formal classroom, or a formal school.

Schools are a relatively new invention for horse shoeing.

The name of my business is Pacific Coast Horseshoeing School,

and we train people to be professional farriers.

A farrier is someone that trims and shoes horses feet.

The state of California, requires that every student that I accept in my program,

either possess a high school diploma, a GED,

or they pass a written exam that's been approved

by the U.S. Department of Education.

You don't have to know algebra to be able to shoe a horse.

You don't have to be able to read a novel, to be able to shoe a horse.

You don't have to be able to write a novel to shoe a horse.

You don't have to possess any kind of degree

in mathematics, or in English in order to shoe a horse.

Horses don't speak English, horses don't do math...

We're good.

Before this law was enacted, I had many many many kids,

from all over the United States that would come through the program that

did exceptionally well and they're still shoeing horses today, making a living.

They had no high school diploma, no GED,

they didn't take a written exam.

A lot of these young folks that are coming to the school

they're looking to better their lives because they have really low end jobs

and in order to support themselves and their families,

their seven days a week, they're working full-time

and they're hardly making it.

Esteban is a young man that has been doing some helping,

he has to support his family and so he has all these little odd jobs that he has to do,

but he doesn't have a high school diploma.

Government is his biggest obstacle to success,

and not because the government is protecting him,

but they just arbitrarily decided that all schools are not allowed to take these kids

unless they meet their requirements regardless of what the training is.

I can't believe that the state of California makes a decision that somebody is not

worthy of investing in their own selves.

They pick winners and losers, based on an arbitrary system of whose finished high school,

and if you haven't finished high school you're not even allowed to invest in yourself, and that's insane.