Getting Started | Forms of Businesses | Business Taxes | Licenses & Permits

Ways to Organize Your Business

Businesses can take different forms, for example:

I. Sole Proprietorship

A sole proprietor is the sole owner of a business. He or she is personally liable for all debts and obligations of the business including liabilities resulting from actions by employees. Profits from the business are taxed as individual income. The sole owner is also personally responsible for the payment of all Social Security taxes, withholding taxes, and unemployment and disability insurance contributions deducted from his employees’ wages, as well as his own contributions. There is no separation of identity between the owner of a business as an individual and his identity as the sole proprietor of his business.

II. Partnership

Partnerships are comprised of general and limited partners.

General Partnership

General partners have unlimited liability, so their personal assets may be used to pay partnership debts. General partners are usually actively involved in the business. Although the law does not require a general partnership agreement, it is always wise to have a written agreement signed by all of the partners. The agreement should spell out how losses or profits are to be divided. Individual partners can hire employees, borrow money, incur debts and perform other acts that are necessary to the business. A sample partnership agreement can be found in The Partnership Book: How to Write a Partnership Agreement by Denis Clifford (2001, Nolo Press).

The same general rules pertaining to a sole proprietor's doing business under a fictitious name apply to a general partnership.

For further information on registration forms and fees, contact:

Secretary of State
Document Filing Support Unit
P.O. Box 944225
Sacramento, CA 94244-2250
(916) 657-5448

Limited Partnership

Limited partners have limited liability - basically their losses can't exceed their investment in the partnership. Legally, limited partners CANNOT have an active role in the partnership; they are strictly investors. A limited partnership is managed and controlled by the general partner or general partners who assume full responsibility and liability for all obligations of the limited partnership.

The limited partnership must comply with the requirements of the California Uniform Limited Partnership Act.

If you choose to establish your company in the form of Limited Partnership, you need to file a Certificate of Limited Partnership (LP-1) with the Secretary of State's Office. For further information on registration forms and fees, contact:

Secretary of State
Document Filing Support Unit
P.O. Box 944225
Sacramento, CA  94244-2250
(916) 657-5448

III. Limited Liability Company

Limited Liability Company is a new type of business entity now recognized in all states. In tax status, a limited liability company closely resembles that of a partnership, and it offers the benefit of limited liability like corporations. In California, you need to file LLC-1 "Limited Liability Company Articles of Organization" Form with the Secretary of State's Office. For more information, contact:

Secretary of State
Limited Liability Companies Unit
1500 11th Street
Sacramento, CA 95814
(916) 653-3795

IV. Corporation

A corporation is created under state law (the California Corporations Code) as a legal entity, separate from the people who own, control or manage it. It is a "person" in the eyes of the law; entitled to enter into contracts, incur debts, pay taxes, etc. Because it is separate from the people who own or manage it, the owners and managers are not personally liable for the taxes and debts of the business. People with claims against the corporation can't reach beyond the assets of the corporation.

There are additional tax advantages to incorporating. Unlike a sole proprietorship, the corporation survives the death of the owner(s). A corporation comes into existence when its Articles of Incorporation have been filed in the Secretary of State's Office.

To register a corporation in the state of California, contact:

Secretary of State
Corporations Unit
1500 11th Street
Sacramento, CA 95814
(916) 653-3985

The following books provide more information on procedures to form different types of business organizations.

• Clifford, Denis. Partnership Book: how to write your own small business partnership agreement, 6th Edition. Berkeley, CA: Nolo Press, c2001. [ 347.7 C637 2001]

Abstract: Analyzes sole proprietorship, partnerships. Explains partnership relationships then gives sample agreements. Has information on permits and licenses, taxes and forms, naming the enterprise, adding partners, expanding the business, what happens if your partner dies or withdraws from the partnership, etc.

• Cooke, Robert A. How to Start Your Own S Corporation, 2 nd Edition. New York, NY: John Wiley & Sons, 2001. [ 347.173 C773 2001]

Abstract: Provides step-by-step procedures to start an S corporation.

• Damman, Gregory C. How to Form and Operate a Limited Liability Company: a do-it-yourself guide, 3 rd Edition. Bellingham, Wash.: Self-Counsel Press, 2002. [ 347.173 D162 2002]

Abstract: Provides a practical step-by-step guide to start a limited liability company. Includes samples of forms and contracts.

Kamoroff, Bernard. Small time operator: how to start your own business, keep your books, pay your taxes, and stay out of trouble, 29 th ed. Laytonville, CA: Bell Springs Pub., 2004 [658 K15 2004]

Abstract: Information on what you need to know to set up shop as your own boss.

Mancuso, Anthony. How to Form Your Own California Corporation. 10 th California ed. Berkeley, Calif: Nolo Press, 2004 [347.1794 M269 2004]

Abstract: Sample forms and step-by-step instructions tailored especially for corporations in the state of California.

• Nicholas, Ted. How to Form Your Own "S" Corporation and Avoid Double Taxation, 2 nd ed.. Chicago, IL: Upstart, c1999. [ 347.173 N622 1999]

Abstract: Explains tax advantages of choosing an "S" corporation.

• Shenkman, Martin M. Starting a Limited Liability Company. New York, NY: J. Wiley & Sons, c1996 [ 347.173 S324]

Abstract: Explains the advantages of a Limited Liability Company (LLC). Describes how to convert partnerships and various corporate forms into LLCs. Includes glossary, checklists, and sample legal forms for starting a LLC. Appendix A summarizes all limited liability company statutes in 48 States (except in Hawaii and Vermont where no LLC statute has passed legislation.)

• Sitarz, Daniel. Incorporate Your Business: the national corporation kit. 3rd edition, rev. and updated. Carbondale, IL: Nova Publishing, 2001. [ 347.173 S623 2001].

Abstract: Includes forms and instructions that you will need to incorporate your business in any state. Offers samples of corporate by-laws, articles of incorporation, board of director's resolutions, etc.

Warda, Mark. How to Incorporate in Nevada from any state. Naperville, IL, Sphinx Pub., 2001. [347.1793 W264]