8/14/2019 Select the Right ENTITY for Your Business - DeeAnn Flores Chase

1/2

20 S o u t h B a y B u S i n e S S i n S i d e r M a g a z i n e 2 n d i S S u e 2 0 0 9

I you are thinking about starting a busi-ness, no doubt you have pondered thequestion, Do I need to orm a business

entity? Te answer is a resounding, Yes!Unortunately, we live in a very litigious

society. Statistics tell us that an estimated50,000 lawsuits are led daily in the U.S.,with nearly 1.4 million led in the State o

Caliornia annually. You should take steps to protect your wealthbeore you ever get served with a lawsuit against your business. Abusiness entity provides personal liability protection rom the debtsand obligations o the business because it has its own legal identityseparate and apart rom its ocers, directors, shareholders, manag-ers or members even i the entity consists o only one person. Iyou are sued based upon an occurrence arising during your businessoperations, a properly ormed and maintained business entity canlimit exposure to a judgment solely to the assets o the business--

and not your amily.It is imperative to orm a business entity before you sign a lease,

contract, ranchise agreement, or otherwise start to do business.Once the entity is properly ormed, every agreement must be signedin the name o your business entity. Forming a business entity be-ore you start conducting business can not only provide personalliability protection, but can also allow your entity to develop cor-porate credit.

Many business owners deer the ormation o a business entityuntil ater they have done business or some time. By that time,however, they have incurred start-up costs and debt that will unor-tunately be reected on the individual owners personal credit. Atthat point, it is not possible to simply roll over the individual debtto a limited liability company. And it is quite dicult to unravelthe business assets and obligations rom the personal ones. Waitingto orm the entity until ater you have been in business or a year ormore means that you must in essence start over when orming theentity at a later point.

Now that weve established that its best to protect your personaland amily assets and build credit, the next step is to determinewhich type o business entity is right or you. Whether you are go-ing it alone or with another person, the choice o a proper businessentity should be made in close consultation with a business law at-

I N C O R P O R A T I O N I N S I D E R

torney and your tax advisor. Business entities include:

General Corporation (C-Corp or S-Corp): I properlyormed and maintained, a corporation provides protection rom

personal liability or the debts and obligations o the corporationor its ocers, directors and shareholders.

C Corporation: A traditional C corporation involves the is-sue o double taxation. Te corporation is taxed on its income atthe corporate level, and its shareholders are taxed on distributionso income in the orm o dividends on their personal income tax.In order to maintain a corporation, corporate ormalities must bemaintained, such as annual meetings and the keeping o minutes.A C corporation has some tax benets, such as deductibility ohealth insurance premiums.

S Corporation: A corporation that has made an election to be anS corporation or ederal income tax purposes is treated as a sole

proprietor or partnership or tax purposes, known as pass throughtaxation; thereby, avoiding double taxation. S corporations havemany limitations in their structure, such as limits on the number oshareholders, citizenship requirements or shareholders, and issu-ance o only one class o stock.

Limited Liability Company (LLC): As with a corporation, a lim-ited liability company (LLC) provides personal liability protectionor the debts and obligations o the business. LLCs also have passthrough taxation where the income and losses pass through to theindividual members tax returns. An LLC may elect to be taxed asa corporation. It can be managed by all o the members or can havecentralized management in one or more o the members, known asmanagers. I properly ormed, an LLC does not need to maintaincorporate ormalities, such as holding meetings and keeping min-utes.

In Caliornia, an LLC may not render proessional services, whichinclude services lawully rendered only pursuant to a license, certi-cation or registration under the Business and Proessions Code,the Chiropractic Act, the Osteopathic Act or the Yacht and ShipBrokers Act. However, the Caliornia Attorney General has opinedthat such services do not include services rendered pursuant to anonproessional occupational license under the Business and Pro-

To Incorporate or Not to Incorporate?

Protect Yourself and Your Business

By Selecting the Right EntityBy DeAnn Flores Chase, Attorney at Law

8/14/2019 Select the Right ENTITY for Your Business - DeeAnn Flores Chase

2/2

S o u t h B a y B u S i n e S S i n S i d e r M a g a z i n e 2 12 n d i S S u e 2 0 0 9

A business entity provides

personal liability protection

rom the debts and obligations

o the business because it has its

own legal identity separate and

apart rom its ofcers, directors,

shareholders, managers or

members even i the entity

consists o only one person.

essions Code. Notably, neither the Contractors State LicensingBoard nor the Department o Real Estate will issue a corporatelicense to an LLC.

Professional Corporation: A proessional corporation is ap-propriate or medical and therapeutic practices, accounting andnance, and legal proessions. Te requirements or proessionalcorporations vary according to the governing body regulating thepractice o a particular proession. Some proessions require cor-porate registration with the governing body; others do not. Manyproessional corporations are limited with respect to who can be o-cers, directors or shareholders in the corporation. Careul analysisis necessary to ensure that a proessional corporation complies withthe requirements or its particular proession.

And now a word or two about DBAs. DBA stands or Do-ing Business As. A DBA is ormed by ling a Fictitious BusinessName (FBN) statement with your clerk in the county (or counties)where business transactions will occur. A DBA is not a businessentity, and provides absolutely no personal liability protection orthe individual or individuals conducting business. Ater a businessentity is ormed, it may be appropriate to le an FBN or the en-tity i it is anticipated that the business entity will transact businessunder a ctitious name that difers rom the name reected on itsregistration documents.

What else is NO a business entity?

Sole Proprietorship: A sole proprietorship is one person alone.He or she will have unlimited liability or all debts o the business,and the income or loss rom the business will be reported on hisor her personal income tax return along with all other income andexpense he or she normally reports. A sole proprietor oten doesbusiness under a ctitious business name as a DBA.

General Partnership: In a general partnership, each o the twoor more partners will have unlimited liability or the debts o thebusiness. Te income and expense is reported on a separate returnor tax purposes, but each partner then reports his or her pro ratashare o the prot or loss rom the business as one line on his or herpersonal tax return.

Limited Partnership: With a limited partnership, each o thegeneral partners has unlimited liability or the debts o the partner-ship, but the limited partners exposure to the debts o the partner-ship is limited to the contribution each has made to the partnership.However, a limited partner may be deemed a general partner i itdetermined that he or she actively participated in the managemento the entity; and thereore, he or she may then have the same un-limited liability or the debts o the partnership.

Ultimately, liability protection depends not only upon proper or-

mation, but proper maintenance to provide the personal liabilityprotection provided by law. Failure to do so will allow a creditor topierce the veil o liability protection in order to collect against thepersonal assets o the individual owners o the entity.

In recent years, many companies have come into the marketplacetelling you that you do not need a lawyer to orm a business entity,make a contract, or get a trademark. But the truth o the matter isthat the money you save by doing it yoursel can cost you thou-sands more dollars in the uture. Why take the risk?nDeAnn Flores Chase has spent the last 12 years counseling and de-

fending individuals and businesses of all sizes. She has successfully de-fended her business clients against a broad range of claims, includingcontract and lease disputes, trademark and copyright infringement, andcatastrophic injury and wrongful death claims. Ms. Chases focus on

liability protection comes from the successful handling of all aspects oflitigation for individuals and businesses of all sizes. o obtain a FREEcopy of Ms. Chases report on Te Four Common Mistakes BusinessOwners Make, visit her website www.sbblmb.com and enter the promocode, BIM. DeAnn Flores Chase A Law Corporation South BayBusiness Lawyers 310-546-8111. Email: deann@dfclawcorpcom.