Sole Proprietorships Advantages

• Easy Setup. Sole proprietorships are very simple and inexpensive to setup.
  
  
  • The owner will still need to comply with local registration and business licenses. A restaurant, for example, may need an alcoholic beverage license, a health permit, commercial refuse collection permit, storm water fees, etc. Check out http://www.calgold.ca.gov/ for permitting assistance in California.


• Control. The single owner controls the entire business and runs the operations.

Sole Proprietorships Disadvantages

• Personal Liability. The owner of a sole proprietorship is personally liable for all debts and actions of the business.


• Legal Separation. Zero legal separation between the business and the person.


• Business Life. Upon death, the business no longer exists.

Partnership Advantages

• Minimal Formalities. Partnerships are not required to elect officers, hold regular meetings, draft corporate and meeting minutes, or issue stock or membership certificates.


• Easy Setup. Partnerships can be created with an informal agreement to start a business. There are no formal filing requirements.


• Split Profits. A partnership will automatically form equal shares in management, profits and losses, and debts and liabilities of the business. However, the split profit structure can be altered with a partnership agreement that opts out of the standard rules.


• Taxes. Partnership are considered pass-through entities. Therefore, the partnership itself does not pay taxes on the income. The income passes through to the owners of the business and they are taxed individually. Compared to corporations, this creates a simple taxing structure.

Partnership Disadvantages

• Personal Liability. The owners of a partnership are personally liable for all debts and actions of the business.


• No Formalities. A lack of formalities can create a lack of organizational structure.

Partnership Agreements

Buy-Sell Agreements

Types of Partnerships

• General Partnership;


• Limited Partnership; and,


• Limited Liability Partnership.

Advantages of Corporations

• Limited Liability. The debts of the corporation are separate from the shareholders; therefore, the shareholders only stand to lose the amount invested in the corporation. Any personal assets of the shareholders are protected, like their bank account and house. Board members, however, may be liable in some circumstances, like mismanagement of corporate funds.


• Investor Opportunities. Ownership interests are great motivating tools for employee productivity. Corporations also provide outside investor opportunities such as venture capital and angel funds. Startups seeking possible investments in the near future will likely consider C-Corporations depending on their investment needs.


• Corporate Formalities. Adhering to corporate formalities is generally seen as a negative; however, these formalities can ensure there is a structured approach to doing business. They establish a Board of Directors and create a formal process for doing business. For some individuals, this hierarchy scheme is welcomed. Moreover, this hierarchy can help establish credibility with customers.


• Tax Advantages. A corporation may deduct health and life insurance premiums. Moreover, not all income is subject to social security, medicare taxes, and workers' compensation withholdings.


• Corporation's Life. Corporations live forever, or until they are dissolved. Sole proprietorships, for example, are dependent on the life of their owners. If the owner dies, the sole proprietorship dies as well. Someone who owns an interest in a corporation may sell or transfer their interest at any time, and the business will continue to operate.


• Transferability of Ownership. Shareholder interests in C Corporations are easily transferred and sold.

Disadvantages of Corporations

• Double Taxation. Profits for C Corporations are taxed when the income is distributed to the shareholders. Shareholders receiving the distributed income are then taxed on their personal tax returns. This can be avoided by making an S Election; however, that changes investment opportunities.


• Corporate Formalities. In order to avoid what is coined "piercing the corporate veil," the corporation must hold annual meetings, keep meeting minutes, maintain bank accounts, file taxes, maintain a board of directors, keep certain records, and ensure the proper compliance with all legal formalities. This can be tedious, burdensome, and scary for the uninitiated; however, the Sacramento business attorneys at Rooted Legal PC help new business owners with all of these formalities.


• Personal Ownership. There is no personal ownership in corporations. The corporation is a separate entity governed by the Board of Directors. In essence, the individuals themselves will no longer have complete control of the business.


• Costs and Expenses. Its more expensive to start a corporation than a sole proprietorship DBA. There are state, and possibly federal, filing fees. There are also pay withholding taxes and other expenses.

Advantages of Limited Liability Companies

• Limited Liability. Members of limited liability companies may limit any personal liability to the amount of their investment. Hence, generally speaking, a member of an LLC is not personally liable for any debts or obligations of the limited liability company LLC; therefore, the individual member's assets like their house and bank account are protected.
  
  
  • There are exceptions however, like a court judgment, personally agreeing to be liable, the alter ego doctrine, personal tortious conduct, breach of a fiduciary duty by a manager or director, as well as a few other specific exceptions.


• Tax Benefits. A limited liability companies with two or more members may elect taxation as a partnership or a corporation. Taxation as a partnership on both the state and federal levels is generally very beneficial. The limited liability company LLC will avoid the double taxation related to a general corporation and will not have the restrictions associated with an S corporation, close corporation, or limited partnerships. A limited liability company LLC also allows for a flexible allocation of income, gains, and losses according to an agreement rather than standard capital interest.


• Management Participation. Corporations are heavily governed. Limited liability companies, on the other hand, has much more flexibility and may be managed by members or non-members. This provides an opportunity to expand the knowledge and specialization of management; thus, establishing a solid foundation for business judgments.

Disadvantages of Limited Liability Companies

• Corporate Formalities. In order to avoid what is coined "piercing the corporate veil," the corporation must hold annual meetings, keep meeting minutes, maintain bank accounts, file taxes, maintain a board of directors, keep certain records, and ensure the proper compliance with all legal formalities.


• Costs and Expenses. It is more expensive to start limited liability companies than a sole proprietorship DBA. There are state, and possibly federal, filing fees. There are also withholding taxes and other expenses.

Attorneys Fees for Daily Business Operations