Welcome to this video on the Forms of Business Organization 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.
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 easy, fast 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 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 $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 that is due annually.
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 process of forming a LLC in California is similar to forming a corporation.
You can do it yourself by filing Articles of Organization or you can get guidance from
a professional to make sure it's done right.
Check StartingYourBusiness.com a list of formation companies 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, 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 Forms 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.
Starting a business is hard, but StartingYourBusiness.com is here to help get your business going.
Our website has a lot of information to make getting started easier, but even better, you
don't have to do all of this on your own.
We have experienced business advisors ready to talk with you to answer your questions.
There is no cost or catch to use our service either, so be sure to check us out at StartingYourBusiness.com
to help get your business started!
How to Register a Business Name in California <slide 10 � intro - How to Register a Business
Name in California> Welcome to how to Register a Business Name
in California, presented by StartingYourBusiness.com.
This video is a part of a series of videos on starting a business in California.
<slide 11 � intro - How to Register a Business Name in California>
After deciding on the legal entity, it�s time to name the business.
The process of naming a business will vary depending on the type of entity chosen.
First off, for sole proprietorships or partnerships there are two options.
One is to operate under the owner�s full first and last name, like John Smith.
This type of name does not need to be registered.
Most businesses will however want to operate under a trade name like John Smith�s Handyman
Service, Mr. Handyman, and so on.
To register, file the Fictitious Name Filing with the County Clerk�s office in the county
where the business is located.
Expect to spend around $50 to register the name.
Note that this does not keep anyone from using the name you choose.
We have more information at StartingYourBusiness.com about protecting your business name with a
trademark.
To register a name for a corporation or LLC, you must have a unique name at the time of
filing.
To check the availability of names, visit the California Secretary of State�s website.
For the exact link, visit our site at StartingYourBusiness.com/california.
While nobody else can form a corporation or LLC with your business name in California,
someone else could still legally use your business name.
<slide 12 outro> If you liked this video on How to Register
a Business Name in California, please click to like it and be sure to watch the others
in the starting a business in California series.
Starting a business is hard, but StartingYourBusiness.com is here to help get your business going.
Our website has a lot of information to make getting started easier, but even better, you
don�t have to do all of this on your own.
We have experienced business advisors ready to talk with you to answer your questions.
There is no cost or catch to use our service either, so check us out at StartingYourBusiness.com
to help get your business started!
How to Get a Business License in California <slide 13 � intro - What Licenses Does a
Business Need In California> Welcome to our video on What Business Licenses
are Needed in California, presented by StartingYourBusiness.com.
This video is a part of a series of videos on starting a business in California.
<slide 14 � intro - What Licenses Does a Business Need>
Starting a business in California may require licenses or permits from a variety of several
city, county, state and federal agencies.
This video is a brief overview on how to get a business license and you can get detailed
information and links to all of the agencies we mention in the video from StartingYourBusiness.com.
(Federal) The first registration you may need to get is the employer identification number,
sometimes known as an EIN with the Internal Revenue Service.
This is a unique identification number for a business, much like what a social security
number is for a person.
Businesses that are required to register include sole proprietorships with employees, partnerships,
corporations or LLCs.
If you are a sole proprietorship with no employees, you can simply use your social security number.
You can apply directly at irs.gov and there is no cost to get one.
This number takes about 5 minutes to get and we have a video on how to get one.
(State) There is no general state business license in California but, there are some
industries that are required to register.
A variety of businesses and professions in the state are regulated such as auto repair
shops, cosmetologists, pest control and many more.
To find links to all of these, visit StartingYourBusiness.com/california (State Sales Tax) Also at the state level,
the California Department of Revenue requires businesses selling products at retail to obtain
a Seller�s Permit.
Most services aren�t taxable but some are.
For more information about what is taxable, visit our site.
(Local) Last, at the local level, some municipalities may require a business license or have requirements
for certain professions, zoning, construction, signage, liquor licenses, etc.
Make sure your business secures all licenses in advance of finalizing a location as some
will take some time to get approval.
Finding the correct person to talk with in your community may take a few calls, but just
start by contacting your town�s mayor, city hall or economic developer and let them know
you plan on starting a business and need to know how to register.
Don�t be worried in calling as they want to help bring in new businesses since businesses
bring jobs and tax revenue to the community.
<slide 12 outro> If you liked this video on What Business Licenses
are Needed in California, please click to like it and be sure to watch the others in
the starting a business in California series.
Starting a business is hard, but StartingYourBusiness.com is here to help get your business going.
Our website has a lot of information to make getting started easier, but even better, you
don�t have to do all of this on your own.
We have experienced business advisors ready to talk with you to answer your questions.
There is no cost or catch to use our service either, so check us out at StartingYourBusiness.com
to help get your business started!
Common Business Taxes in California <slide 16 � intro - Common Business Taxes
in California> Welcome to Common Business Taxes in California,
presented by StartingYourBusiness.com.
This video is a part of a series of videos on starting a business in California.
<slide 17 � Common Business Taxes in California> Small businesses are directly involved with
the collection of several taxes.
This video is just a brief overview of taxes a business may have to pay when having a business
in California.
We suggest working with an accounting professional to be sure you have your business ready to
pay all relevant taxes.
(Sales) Generally speaking, physical products, sold at retail, are taxable within California.
So, if you sell a pair of shoes from your store, you would charge the customer sales
tax.
This tax varies depending on where your store is located.
Most services are not taxable but check Startingyourbusiness.com for more information about what is taxable
and rates.
(Self- Employment) The next common tax to talk about are self-employment taxes for sole
proprietors, partnerships and the owners of some LLC�s if they elect to be taxed as
such.
Self-employment taxes are based on the profits in the business and are a replacement for
payroll taxes which is a combination of Social Security and Medicare taxes.
These taxes will be in addition to any income taxes that you would pay on the profits of
the business.
(Income) Another common tax to talk about are income taxes.
All businesses will have the profits of the business taxed.
The process of taxation and tax rates are going to be different depending on the business
entity.
This is a pretty complex topic that is best discussed with an accounting professional.
<slide 19 outro> For more information about the different business
taxes in California, check out Startingyourbusiness.com.
If you liked this video on Common Business Taxes 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!
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