Legal Question in Business Law in California

Re: Registering a Business in California

If you plan to do business on a small scale initially, and if such activity involves little liability risk, you file a fictitious business statement with your local county and a business license application with your local city and you are off and running as a sole proprietor. This is the simple and inexpensive route but leaves you exposed to personal liability for your business risks.

To get limited liability, you will want to set your business up as either a limited liability company (LLC) or a corporation.

An LLC functions basically like a general partnership but gives its owners (called "members") limited liability protection. It is formed by filing articles of organization and then adopting an "operating agreement" - a document that defines the important rights among the members (much like a partnership agreement does in a general partnership). California permits one-member LLCs. LLCs normally function as tax pass-through entities, with the entity reporting annual operating results to the IRS and FTB and with the individual members having the net profit/loss allocated to them individually for tax reporting and payment on their individual 1040 returns. You need to pay a minimum franchise tax of $800 per year to maintain an LLC (more if revenues are high).

With a corporation, you get limited liability protection as well. You can file as a C-corp or an S-corp, the latter of which functions as a tax pass-through entity much like an LLC. You do this by filing articles of incorporation and by following this up with a first meeting of directors in which all the key organizational decisions are made (including the Subchapter S election, if desired). You should also look into "personal service corporation" tax implications to make sure you do not fall into a potentially disadvantageous tax category. As with the LLC, you will need to pay a minimum franchise tax of $800 per year.

Logistically, you have three options for registering:

1. Use an online service, which is cheap but leaves you flying blind.

2. Do the online service route but couple it with self-help resources that instruct you how to "do it yourself." This will help solve the "flying blind" problem but will involve an investment of your time that may or may not be worth it to you to learn about legal options.

3. Do it through a lawyer. This costs a little more but is normally worth the added expense because of the expertise you receive from the lawyer. I have a detailed discussion of this in an FAQ section on my website entitled "Why use a business lawyer?" which may be helpful to you (http://grellas.com/faq_small_business_002.html).

Even if you do it yourself, it is normally good practice to consult with a good business lawyer anyway. This will give you important guidance about the process.