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Three common types of business structures

| Jun 11, 2021 | Business Formation |

As the economy in California picks up you may decide you want to leave the rat-race behind and be your own boss by starting a business. One of the first decisions you will have to make is what type of structure is best for your new enterprise. The following is a brief overview of three common types of business structures.

Sole proprietorship

If you are going into business alone and do not choose any other type of business structure your business will be a sole proprietorship. A sole proprietorship is not a separate entity from its owner for legal purposes. This means that you can be personally liable for the business’s debts and obligations. Those whose business is low-risk or just getting off the ground may choose to structure their business as a sole proprietorship.

Partnership

If you and one or more persons want to go into business together you may decide a partnership is right for you. There are two basic types of partnerships. The first type is a limited partnership (LP). In a limited partnership, one partner has unlimited liability and pays self-employment taxes, and the remaining partners have limited liability and limited control over the partnership. Most limited partnerships have a partnership agreement in place. Profits made by the partnership go through to the partners’ personal tax returns.

Limited liability partnerships (LLP) are another common type of partnership. Unlike a limited partnership all partners in a limited liability partnership have limited liability. This means they are not responsible for the partnership’s debts or the acts of the other partners. Groups wishing to go into business together often start off as partnerships before transitioning into a more formal business.

Limited liability company

A limited liability company (LLC) provides the benefits of both partnerships and corporations. In most situations, the owner of an LLC will not be personally liable if the LLC is sued or goes bankrupt. In addition, the profits and losses of the LLC are passed through to the owners’ personal income without having to pay corporate taxes. However, owners of the LLC must pay self-employment taxes. In many states, if an owner joins or exits the LLC the LLC must be dissolved and reformed to reflect the current ownership unless the LLC has a prior agreement on the transfer of ownership. Those whose business is high-risk or those who have substantial personal assets to protect may choose to structure their business as an LLC.

Learn more about business formation in California

These are only three common types of business structures that may be worth considering if you are looking to start your own small business in California. This post is for educational purposes only and does not contain legal advice. Our firm’s webpage on business formation may be a good resource for those who want further information on this topic.