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Business Legal Structure

A business may be conducted through a variety of organization structures. A specific business structure is generally chosen for liability and/or tax reasons. The three most common types of business organizations are sole proprietorships, partnerships, and corporations her "C" Corporation or Subchapter "S" Corporation).

Sole Proprietorship

One person operating a business as an individual is a sole proprietorship. The sole proprietorship is the most common form of business organization. Profits are taxed as income to the owner personally. This rate is usually lower than what the corporate tax rates would be. The owner has complete control of the business but faces unlimited liability for its debts. Since this is a fairly simple type of legal structure, there is very little government regulation and reporting.

A sole proprietorship registers an assumed name or "DBA" ("doing business as") at the county clerk's office in the county in which the business is located. The process protects the name for five years in the county where it is registered, at which time it can be re-registered.

For more information contact your local county clerk.


General Partnership

A partnership exists when two or more persons join together in the operation and management of a business venture. Partnerships, like sole proprietorships, are subject to relatively little regulation and are fairly easy to establish. A formal partnership agreement is recommended in order to address potential conflicts before they arise; for example, who will be responsible for performing each task, what, if any, consultation is needed between partners before major decisions are made, and so on. Under a general partnership, each partner is liable for all debts of the business. All profits are taxed as income to the partners based on their percentage of ownership.

A general partnership, like a sole proprietorship, registers an assumed name with the county clerk's office in the county in which the business is located.

For more information contact your local county clerk.


"C" Corporation

A corporation is a legal entity made up of persons who have received a charter legally recognizing the corporation as a separate entity having its own rights, privileges and liabilities, apart from those of the individuals forming the corporation. It is the most complex form of business organization and is comprised of three groups of people: shareholders, directors, officers. The corporation can own assets, borrow money, and perform business functions without directly involving the owner(s) of the corporation. The corporation, therefore, is subject to more government regulation than proprietorships or partnerships. Corporate earnings are subject to "double taxation" when they are passed through as stockholder dividends. However, corporations have the advantage of limited liability.

In order to form either a profit or non-profit corporation, "Articles of Incorporation" must be filed with the California Secretary of State. The business name becomes protected in California, and no other business may register a name currently on file.

If you have decided to incorporate your business, contact:

The Secretary of State's Office
1500 11th Street, 3rd Floor
Sacramento, CA 95814
(916) 657-5448
(916) 657-5448 for Articles of Incorporation
(916) 654-7960 for Name Availability

www.ss.ca.gov


Subchapter "S" Corporation

A special section of the Internal Revenue Code permits a corporation to be taxed as a partnership or sole proprietorship, with the profits taxed at the individual rather that the corporate rate. To qualify as a Subchapter "S" corporation, a business must meet certain requirements.

For more information, contact the IRS and request IRS publication 589 by calling 1-(800) 829-1040. You can download IRS forms by connecting to the IRS address at: http://www.irs.ustreas.gov.

Here is a chart summarization of different types of business structures

For more information on choosing a legal structure, call the Silicon Valley - SBDC Office at (408) 351-3600.