When you’re thinking of running any business, one of the major steps that you have to undertake is to determine the type of business entity you want. While we can not give you advice, here are some basic and common knowledge facts about California Sole Proprietorship or California Limited Liability Companies.
When it comes to deciding the type of business, the most common conundrum that various owners of small business face is choosing between sole proprietorship and a Limited Liability Corporation – LLC. To successfully choose between them take a closer look at these two entities.
Start up Procedure and Costs
- Sole Proprietorship – These are the easiest business entities to form as the costs and filing procedure isn’t as expensive or as extensive as an LLC’s. You do not have to register your business with the Secretary of State. In the event that the business is being registered in a name other than the owners, a Fictitious Business Name Statement must be filed for it, with a small fee.
- Limited Liability Corporation – LLC – LLC’s must be registered with the Secretary of State along with documentation of all the partners involved in the business venture. In California, an Articles of Organization form (LLC-1) must be filed along with the applicable documents as well as an Operating Agreement with a fee. After a time period of 90 days, a Statement of Information (LLC-12) must be filed with a fee as well.
Annual Compliance
- Sole Proprietorship – Sole proprietorships are free of any annual compliance to the Secretary of State.
- Limited Liability Corporation – LLC – LLC’s must submit a Statement of Information (LLC-12) along with the applicable fee in order to maintain their business.
State Taxes, Federal Taxes and Other Fees
- Sole Proprietorship – Sole proprietorships are not subjected to any state taxes in California. Federal tax is applied on a personal income basis of the owner or partners of the business.
- Limited Liability Corporation – LLC – All LLC’s are subject to a Franchise tax by the State of California. LLC’s with an annual income that is less than $250,000 must pay an annual fee of $800. If revenues exceed $250,000 they will be eligible to pay an additional amount, usually a graduated fee ranging from $1000 – $10,000. Late filing is also subject to a penalty fee. Federal tax applied on LLC is similar to that of sole proprietorship.
Risks Involved
- Sole Proprietorship – Sole proprietorships expose all members or the owner to personal liability risks. With no legal barriers between company and personal assets, all business obligations and debts are automatically assumed by the owner, regardless of the fact that they were incurred under the business name. Access to funds can also be limited owing to this factor since investors and banks will also face certain risks in seeing returns.
- Limited Liability Corporation – LLC – LLC’s are more secure, with a distinct barrier between personal and business assets. Owners are not always exposed to risk to a certain extent. Certain conditions may put an owner at risk but these are limited. Owing to this, investors are not as hesitant and financial institutions cannot only expect returns but also gauge business’s profitability based on its annual reports.
Whether you opt for a sole proprietorship or an LLC, at the end of the day, pick an entity that will fit in with your current as well as future business plans.