BUSINESS FORMATION BASICS
Have an idea for a business? Where do you start transforming that idea into a business? Determining business formation is one of the first and most important steps to starting a business, whether it be in California, New York, Delaware or elsewhere. It can make a difference in terms of taxes, liability, profitability, growth, and more. Getting it right from the very beginning is critical.
I have been advising business clients on entity formation and related matters for over 20 years, guiding and counseling clients through the process, proactively ensuring all forms, documentation, and other necessary legal information and strategies are in place for a successful venture. Read more about my Business Organizations practice here.
To set up a Free Consultation, click here to schedule an appointment directly.
How Do You Form a Business in California, New York, or Delaware?
When forming a business, one of the first and most important decisions to make is the structure you will use. A business structure is the legal classification of a business that determines its ownership structure, management rights and duties, tax obligations, personal liability of the owners, and other legal powers, rights, and responsibilities.
A range of business structures is available, including:
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- Corporation
- Professional corporation (for certain licensed professions)
- Limited liability company (LLC)
- Limited liability partnership (LLP) (for certain licensed professions)
- General partnership
- Limited partnership
- Joint venture
The best business structure for your business depends on a range of different factors.
What Factors Influence Business Formation in California, New York or Delaware?
Here are some factors to consider when choosing the best structure for your business.
Control
A major deciding factor when structuring your business is often the degree of control you want to retain over your business. This is especially true where multiple owners are involved.
A sole proprietorship allows for the fullest control. As the only owner and operator, a sole proprietor can run their business how they want to. In comparison, corporations are answerable to shareholders who elect a board of directors to manage the organization's day-to-day business. However, a sole proprietorship is not a business entity, and does not offer the many benefits available to the owners of a corporation, LLC or other business entity, even if there is only one owner.
Liability
Your business structure also determines the extent of your personal liability for the liabilities, debts, and obligations of the business. Some structures offer better protection against personal liability. Sometimes, liability and control are directly proportional: the less the personal liability, the less control over the business.
For example, in a sole proprietorship, for example, the owner is personally responsible for the business's liabilities and debts. Their personal assets may be used to satisfy the business's debts. They can also be sued in relation to the business's activities.
In comparison, in a limited partnership, partners have a separate legal identity from that of the business and their personal liability is limited to their investment in the business.
On the other hand, in a corporation or an LLC, limited liability and control may both be maximized, depending on the nature of the business and the relative rights and responsibilities which the owners agree to.
Taxes
The structure of a business determines the applicable tax regime. Many business structures – sole proprietorships, partnerships, limited liability companies, and "S-corporations" – are pass-through or "tax-disregarded" entities. This means the business doesn't separately pay tax. Instead, the tax liability is passed to the owners who pay taxes on the business profits or take deductions on the business losses on their personal tax returns.
"C-corporations" are treated as separate entities from their owners and taxed according to the relevant corporate rate.
Administration
The degree of administration and governance obligations of a business typically becomes more demanding as the complexity of the business structure increases.
Five Important Ways a Lawyer Helps Your California, New York or Delaware Company
A business lawyer can advise you on a range of issues when forming a business. Read more about my Business Organizations practice here.
1. Choosing the Right Structure for Your Business
Choosing the right structure is the key to building a strong foundation for your business and its future growth. A business lawyer can advise you on the pros and cons of each structure available to you, relevant to your circumstances. This will help protect both your interests and your business's interests in the future.
2. Industry-Specific Advice
A corporate attorney can give you advice specific to the industry in which you operate, as well as the product or service you're offering. This includes assisting you with understanding the applicable regulations and any necessary licenses or permits.
3. Drafting and Negotiating Legal Documents
Business formation typically involves the preparation of a range of documents, such as business registration papers, intellectual property registrations, and other commercial documents. A lawyer can assist you in accurately drafting these documents.
Importantly, a business attorney can draft legally binding contracts or negotiate the terms of a contract to benefit you and your business. These are essential to many aspects of running a business, for example, partnership agreements.
4. Understanding Your Tax Obligations
Failing to properly understand your tax obligations can result in significant tax liability down the track. Taxation is a complex area so engaging a business lawyer, along with a qualified tax accountant, is the best way to ensure compliance.
5. Employment Law
If you hire employees, you must comply with a suite of employment laws and regulations. A business lawyer can help you navigate these and draft effective employment contracts that protect both you and your employees. Termination especially can be a legal minefield, so reliable legal advice on this is essential.
As with tax law, employment and labor law is very complex and esoteric, often not intuitive, and increasingly employer-hostile; a corporate attorney experienced in working with businesses can be helpful in spotting critical employment law issues, but in many cases actual employment law advice will be best provided by a management-side employment law specialist. If a management-side employment attorney is appropriate, I can make introductions to experienced practitioners to add to your team of professional advisors.
Contact a Small Business Lawyer in Los Angeles or Ventura County, CA, or New York City Today
If you are an entrepreneur or otherwise are planning to launch a business and you want to structure it properly to protect your interests, contact me. I would love the chance to discuss your business and the alternative business structures available to you so you can focus on growth and executing on your business strategies. Click here to make an appointment now for a Free Consultation. Read more about my Business Organizations practice here.
Disclaimer
This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read Legal Notices here.