Legal Blogs

How do I Choose the Right Type of Business Organization?

There are multiple different types of business organizations you can use when starting or growing a business in Irvine, CA.  The primary types of business organizations that you can choose from include: sole proprietorship, partnership, limited liability company (LLC), S-corporation, and C-corporation.

Business Type

Business Type

The type of business that you select is going to impact how your organization is taxed, as well as what liability protections you receive (if any). It is also going to affect how easy or difficult it is for you to sell your interest or transfer ownership of your company. To choose the right type of business organization, you should speak with an Irvine business law attorney at Brown & Charbonneau, LLP who can advise you on what business form is the right one for your needs.

How to Choose the Right Type of Business Organization

To choose the right type of business organization, you must consider:

  • Paperwork requirements as well as initial and ongoing costs
  • Liability protections so you do not become personally responsible for debts and judgments
  • Tax implications
  • Future transferability of the business

These issues can vary significantly depending upon the type of business organization. For example:

  • A sole proprietorship has the least initial amount of paperwork (none may be required) and virtually no ongoing costs since you and your business are the same legal entity. You do not have any protection from liability and your business income is taxed on your personal return. Transferring the business is difficult or impossible.
  • A partnership requires initial partnership documents but limited ongoing paperwork. Startup costs are generally low. You have no protection from liability and are responsible for debts and judgments incurred by you or by the partners.  Income and losses are passed through to partners and taxed on personal returns.  Transferring the business is difficult or impossible.
  • A limited liability company requires initial paperwork with the state but you are not required to file annual reports. You are protected from liability. An LLC is a pass through entity, so owners are personally taxed on income. Transferring ownership is easier than for a partnership or sole proprietorship in most cases, but may be more difficult than for a corporation.
  • An S-corporation has initial and ongoing paperwork requirements with the state, including a required annual report. You are protected from liability.  You have more flexibility with taxes. Owners declare profits and losses on tax returns, but you have flexibility in how the business income is paid out to you. Owners do not have to pay payroll taxes (Social Security and Medicare taxes) on distributions.  A tax return must be filed for the S-corporaiton although the owners, and not the business, pay taxes.  Transferring an S-corp is possible but there are limitations on the number of owners, as well as certain other restrictions.
  • A C-corporation has initial and ongoing paperwork requirements, like an S-corporation. It  provides protection from liability.  The company is taxed on profits and losses, and owners may be taxed when profits are distributed. There is potential for double taxation.  C-Corporations are generally the business form that makes the transfer of ownership easiest. Many large publicly held companies are C-corporations.

An experienced Irvine business lawyer can help you to consider each of these business organizations and decide what is the right type of business organization for you. Call Brown & Charbonneau, LLP today to learn more.