One of the most exciting endeavors in life is starting your own company. You've always dreamed of starting your own business for a long time, and now it's finally happening. As exciting as starting your own company can be, there are important legal and tax aspects to remember before and during operations. The formation of a legal framework is the first step in starting a company. To ensure that the process runs smoothly, you'll need the help of a knowledgeable Business Law Attorney.

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Find A Business Law Attorney in California to Help You

The legal entity in which the company will be conducted is one of the most important decisions a business owner must make. Different types of entities are available in California, each with different degrees of asset security, tax advantages and disadvantages, management complexity or simplicity, and other characteristics. In California, small business organizations such as LLCs, Corporations, and Non-Profits are available in addition to sole proprietorships.

Starting a New Business: A Step-by-Step Guide

Your Business Law Attorney will assist you with all aspects of launching a new company, including:

  • Starting a new company necessitates more than just a brilliant idea; it necessitates a strategy. Our Business Law Attorneys have the expertise and commitment to help you take your initial concept and turn it into a winning plan for a profitable company.
  • Person selection: Whether you work as an LLC, a sole proprietorship, or another business entity, your exposure to legal responsibility, taxation, and other factors will all be affected. Our Business Law Attorneys will provide you with sound legal advice and consultation to help you select the business model that best suits your long-term goals.
  • Operating documents: Business Litigation Lawyers assist clients in drafting their initial operating documents, shareholder agreements, mission statements, and other important business documents.
  • Filing with the Secretary of State: Our Business Law Attorneys will assist you in organizing, preparing, and filing all necessary paperwork with the Secretary of State in order to start your company.
  • Contracts: Business Litigation Lawyers assist clients with the negotiation, preparation, and analysis of initial contracts, such as vendor agreements, relationship agreements, and lease and rental agreements, at the start of their companies.
  • Financing: Business Litigation Lawyers will help you raise capital and handle budgeting constraints, as well as provide venture capital advice to clients.
  • Real estate: Business Litigation Lawyers will help with buy/sell deals as well as real estate, property rights, and other conflicts.

Types of Businesses

Choosing the right legal framework and organization is one of the most critical steps in starting a new company. The structure you select will have an impact on your taxes, documents, and future liability problems your business can face. It is not a decision to be taken lightly by entrepreneurs, as it can have significant financial and legal ramifications for your business.

The following are examples of various categories of business entities:

1. Sole Proprietorship

A sole proprietorship, as the name implies, is a company owned and operated by one person. The low costs and ease of setup are two of the advantages of forming a sole proprietorship for your company. Depending on the industry, you would only need to file a few legal forms if the company name is the same as your name. The main drawbacks of using a sole proprietorship as your business company are related to your responsibility. There is no legal distinction between you and your company as an unincorporated entity. You are directly responsible for all company operations, including all expenditures, debts, and tax obligations.

2. General Partnership

A general partnership is identical to a sole proprietorship in terms of corporate structure. The main distinction is that a general partnership necessitates the participation of two or more individuals in the company as co-owners. The relationship can be formed automatically if the partners work together for the purpose of doing business or by drafting a partnership agreement. A general partnership requires the filing of a few extra legal papers. A fake corporate name, a federal tax ID, and a business license are examples of legal documents. While forming a general partnership is relatively simple and inexpensive, there are some drawbacks to this type of business structure. Each partner's liability is unlimited, not only for his or her own contributions to the company or individual conduct but also for those of the other partners. These duties, similar to those of a sole proprietorship, may include, but are not limited to:

  • All costs are owned by you.
  • Debts owed are the responsibility of the person who owes them.
  • Any of the partners may impose business taxes on the group.

A general partnership is, therefore, a risky business organization. Furthermore, if one of the partners leaves the company, the relationship is dissolved, and a new business entity must be formed. Consider one of our prescreened California Lawyers in your Cal Bar Attorney Search.

3. C Corporation

A C Corporation, also known as a C Corp, is a legal entity independent from its members. The corporation's owners are known as stockholders or shareholders. There are many advantages of forming your company as a C Corp. The C Corporation is solely accountable for its debts and responsibilities. Furthermore, this form of company has everlasting life, which means it will continue to survive even though all of its shareholders leave or die. Additional shareholders or investors may be attracted to the company by issuing different types of shares with different preferences. With well-structured governance, this corporate arrangement divides the company's ownership and management.

The stockholders elect directors, who are in charge of the corporation's business decisions. Because of this distinction, a C Corp will protect each owner from personal liability. This advantage, combined with the ease with which ownership can be transferred, makes a C Corp a favored business entity for both venture capital funds and passive investors. A C Corporation, on the other hand, operates as a separate taxable company, which is the greatest drawback. Earnings are taxed twice: once at the entry-level, and then at the stockholder level on dividends, a process is known as double taxation. Forming a C Company necessitates the production and filing of more legal documents than forming a sole proprietorship or general partnership, both at the time of formation and on an on-going basis. Getting legal advice from an experienced Business Law Attorney is the best way to ensure the C Corp is properly developed.

4. S Corporation

An S Corporation, also known as a S Corp or an IRS subchapter-S, is a form of corporation that is similar to a C Corporation. The biggest advantage of an S Corporation is the way the corporate tax plan is set up. The company has a flow-through tax system, which means that income is only taxed once at the time of distribution to shareholders. The S Corporation company structure has several drawbacks. There are a total of 100 shareholders in the company. Individuals, tax-exempt corporations, and trusts must all be shareholders. Many funds may find it difficult to invest in the company because they do not fall under these constraints. Furthermore, the company is limited to issuing only one type of stock to investors. The company is unable to sell workers lower-cost shares and preferred stock to investors. Forming an S Corp, like creating a C Corp, necessitates the production and filing of several legal papers, both at the time of incorporation and on an on-going basis. The best way to ensure that the S Corp is properly structured is to seek legal advice from an experienced Business Law Attorney.

5. Limited Liability Partnership (LLP)

A Limited Liability Partnership, or LLP, is a form of a general partnership with fewer liabilities. The LLP is made up of general and limited partners. The general partners are in charge of the company's operations and are responsible for all debts and commitments. Limited partners usually contribute capital and bear only a small amount of risk. A limited liability partnership (LLP) is a common choice of organization for partnerships in which one or more partners choose to maintain leverage over business decisions while also bringing on new investors. A flow-through tax system in which each partner is taxed separately benefits all partners. You should make sure that an LLP has a strong, legally binding relationship agreement in place. Legal advice and assistance in the development of your LLP can be obtained from an established Business Litigation Lawyer.

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6. Limited Liability Company (LLC)

A Limited Liability Company, or LLC, is a corporate entity that incorporates many of the advantages of general partnerships and corporations. Although an LLC is less complicated to set up than a C or S corporation, it also offers limited liability to its members. Shareholders, including general partners, benefit from a single tax rate. The most significant drawback of an LLC is the restriction on who can invest in it. Venture capitalist investment restrictions can limit the company's potential investments. The creation of an LLC necessitates the filing of several legal papers, including the Articles of Incorporation. An operating agreement is also established, which spells out benefit-sharing, decision-making, and interest allocation among members. Hiring a Business Litigation Lawyer that specializes in Limited Liability Company creation will provide you with the legal guidance you need to start your business successfully.

7. Public Benefit Corporation

The Corporate Flexibility Act of 2011 established a Public Benefit Corporation, also known as a California Benefit Corporation in California. Benefit Corporations were created with the aim of allowing social organizations to follow both for-profit and non-profit objectives. While a Benefit Corporation is similar to a C Corporation in terms of business structure, it requires corporate officers and directors to recognize the triple bottom line of profit when making decisions. A California Profit Corporation differs from a California Corporation in three ways:

  • A public benefit intent is needed.
  • Directors are better protected by shareholders when it comes to pursuing the triple bottom line.
  • Regulation of transparency and responsibility

To summarize these characteristics: The Articles of Incorporation of a California Profit Corporation must state that the corporation's sole purpose is to provide a general public benefit. The interests of shareholders are not prioritized over the other components of the triple bottom line of profit, citizens, and earth. This encourages the board of directors to make decisions that serve the public good rather than the shareholders' bottom line. The corporation must pass three tests to ensure transparency and accountability regulation: a third-party appraisal standard, an annual benefit report, and a benefit enforcement proceeding. Making the decision to form your company as a California Benefit Corporation is a significant social commitment. However, there are many unique legal provisions for this form of company that must be recognized and practiced. Hiring a Business Litigation Lawyer to complete and file all of the required legal paperwork frees up your time and resources to concentrate on what you do best: running the company and improving society.

Non-Profit Organizations

A not-for-profit or non-profit organization is one that works for the betterment of society, the environment, or a specific community of people. Despite the fact that the company is organized like a corporation, it is not owned by individuals or shareholders. Our Business Litigation Lawyers are familiar with the various forms of corporate organizations available for your non-profit organization. The following are the most popular forms of non-profit company structures.

Public Benefit Nonprofit Corporation

When most people think of a "non-profit," they think of a Public Benefit Nonprofit Corporation. The organization is normally set up to offer charity to the general public or a particular subset of the general public. A Public Benefit Nonprofit Corporation is typically made up of organizations that offer social services, educational programs, and creative activities.

Non-profit Mutual Benefit Corporation

A Mutual Benefit Nonprofit Corporation concentrates its resources on a small number of individuals. Mutual Benefit Nonprofit Corporations include membership groups such as chambers of commerce, unions, and homeowner's associations. The corporate structure is similar to that of a Public Benefit Nonprofit Corporation, but the mission is narrower in scope, focusing its benefits on a single entity or cause.

Private Foundation

A private foundation is traditionally financed by a donor, family, or corporation, as opposed to public or mutual non-profit organizations, which rely on public funds and fundraising to function. Since a private foundation is controlled by the donor, you may create key aspects of the foundation, such as:

  • The Foundation's Goals
  • The Foundation's Board of Directors
  • The Investment of Funds
  • The Funds' Disbursement

A foundation, like any organization, may be established with the intention of continuing to serve your cause in perpetuity.

Exemptions under Sections 501(c) and 501(c)(3) of the Internal Revenue Code

The government grants not-for-profit organizations tax-exempt status, which is a significant distinction and advantage. Non-profits are eligible for tax exemption under Sections 501(c) and 501(c)(3) of the Internal Revenue Code. Section 501(c)(3) defines charitable non-profit criteria and eligibility, while other subparagraphs of Section 501(c)(2) specify service and membership (c). To be eligible for tax exemption, an entity must comply with a number of federal and state regulations, including:

  • Creating a clause for a particular intent
  • There were several initial directors.
  • A special language that governs how business matters are done
  • Self-dealing is prohibited.
  • Engaging in propaganda or attempting to manipulate laws or elections is prohibited.

For non-profit organizations, If a charitable organization's application for tax-exempt status is approved by the IRS, donors may subtract their donations from their personal or corporate taxes. Many factors influence which form of business structure your charitable organization can use, including its purpose, target beneficiary, federal regulations, and state laws, to name a few. Hiring a legal team with expertise in non-profit company creation will provide you with the legal advice and guidance you need to make sure your non-profit complies with all federal and state regulations.

Dissolution of a Business

When the company is facing dissolution, you have two main choices to consider. Dissolution is the first choice, and bankruptcy is the second. In both cases, it's important to ensure that the correct protocols are followed and that all standards are met. As you try to close your business, having the right Business Law Attorney on your side is crucial. Our knowledgeable Business Litigation Lawyers will assist you in completing this project successfully.

A business entity's dissolution is the formal process of ceasing operations, liquidating assets, and distributing funds to creditors and shareholders. You must observe formal dissolution protocols at all times during this period. You should also be cautious about the choices you make about asset liquidation and payment. Improper conduct may render the dissolution null and void, putting you at risk of personal liability. In severe cases, a company's creditors may force the company's involuntary breakup.

When a company has few assets and many creditors, it might be necessary to declare bankruptcy. Some companies can reorganize and become profitable again after filing for bankruptcy. Management would remain in charge of the company, but major business decisions would need bankruptcy court approval. Some companies chose to close their doors permanently. The properties of the company are sold to pay off the debt, and a trustee is named. Secured creditors are paid first in such cases. Unsecured creditors, such as bondholders, are paid first, followed by stockholders. Stockholders can not receive anything if secured and unsecured creditors may not receive full payment.

Dissolving a business partnership

Business relationships, like all things, come to an end at some point. With the completion of a specific contract or mission, some of these agreements actually come to an end. Others come to an end when one of the partners dies or when the partners have a disagreement. Others can dissolve when the partners decide that reforming as a corporation or a limited liability company would be more beneficial. If any of these conditions relate to your case, you can speak with a Business Litigation Lawyer who is familiar with dissolving business partnerships in California.

  • Dissolving a business relationship in California is subject to certain restrictions. The majority of these requirements apply to making the dissolution public so that all parties involved are aware of the change in circumstances. The California Revised Uniform Partnership Act, for example, mandates that legal notice of termination be published for at least 12 business days. According to the statute, suppliers, creditors, and other interested parties are also entitled to direct notice. It's also necessary to file dissolution paperwork with the state as well as the Internal Revenue Service.
  • When it comes to dissolving a business relationship in California, it's best to work with a competent Business Law Attorney to ensure compliance with the law and the best possible result for you as an individual. If the partners are engaged in a disagreement, legal advice is needed. In such cases, it is important to seek legal advice to ensure that all partners' interests are secured and preserved.

When spouses are involved in a disagreement, they will need the assistance of an experienced Business Law Attorney to interpret the provisions of the initial partnership agreement. This agreement should provide instructions for ending the relationship, and it's only fair to make sure that everybody follows them. On the other hand, if the partnership agreement is poorly written or lacks adequate explanations of how to end the partnership, it is important to rely on the expertise and experience of a California Business Law Attorney to help fill in the blanks based on California law and the partners' intent. Business Litigation Lawyers will frequently negotiate a dissolution that is fair to both involved and follows the roles and obligations laid out in the original relationship agreement.

Statutes for LLC Dissolutions

  • Article 7 of the California Revised Uniform Limited Liability Company Act ("CRULLCA"), Sections 17707.01 to 17707.09, lays out the legislative procedures for dissolving and terminating California, limited liability companies.
  • The activities that will or may trigger dissolution are outlined in Section 17707.01. It was changed in 2016, and it went into effect on January 1, 2017.
  • Section 17707.02 makes it easier to dissolve a limited liability company (LLC) that hasn't done much business. It was changed in 2016, and it went into effect on January 1, 2017.
  • The procedure for an LLC manager or member to petition the court for a judicial decree dissolving an LLC is outlined in Section 17707.03. It also establishes a framework for non-petitioning members to prevent judicial dissolution. This section was updated in 2016, and it went into effect on January 1, 2016.
  • The jurisdiction and compensation of the individual or persons winding up the affairs of an LLC are outlined in Section 17707.04. This section was first introduced in 2012, and it became effective on January 1, 2013.

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  • Section 17707.05 specifies the order in which LLC assets can be allocated during the winding-up period. Before making distributions to members, an LLC must first pay off or sufficiently provide for all of its identified debts and liabilities owed to non-members. This section was introduced in 2012, and it became effective on January 1, 2013.
  • A canceled LLC (one that has filed a certificate of cancellation as the final step in dissolution) may continue to exist for certain purposes, such as distributing assets that were previously excluded in the winding-up process, according to Section 17707.06. It expressly permits a lawsuit brought against or by an LLC to proceed after the LLC has been dissolved. This section was updated in 2015, and it went into effect on January 1, 2016.
  • Causes of action against dissolved LLCs are enforced under Section 17707.07. It establishes a mechanism for recovering properties that have been allocated to members after the dissolution of the corporation. It also specifies the statute of limitations for litigation against dissolved LLCs in general, with an exception for quiet title acts. This section was updated in 2019 and will go into effect on January 1, 2020.
  • Section 17707.08 specifies the Secretary of State filing specifications for the dissolution process, which begins with the filing of a certificate of dissolution and concludes with the filing of a certificate of cancellation. If all of the LLC's members vote for dissolution, the certificate of dissolution can be skipped, and only the certificate of cancellation can be filed after the winding-up is completed. This section was updated in 2015, and it went into effect on January 1, 2016.
  • In a variety of cases, Section 17707.09 allows LLC members to withdraw a filed certificate of dissolution and continue the business of the LLC. This section was updated in 2015, and it went into effect on January 1, 2016.

Steps You Need to Take

When dissolving a business relationship in California, it's always best to seek legal advice—working with a skilled business litigator, such as is a great place to start.

Form a corporation or a limited liability company (LLC)

The breakup of a corporation must be approved by the company's shareholders. In corporations, the action must be approved by the shareholders; in limited liability companies (LLCs), the action must be approved by the owners. Shareholders or members of small companies are often active in day-to-day activities and are familiar with the circumstances. The dissolution process and necessary approvals are usually outlined in a corporation's bylaws and an LLC's operating agreement. The board of directors should draft and accept the resolution to disband in order to comply with corporate formalities. Shareholders then vote on the resolution that has been approved by the board of directors. Both activities should be reported and kept in the company's files. Although LLCs are not subject to the same formalities as corporations, it is always a good idea to record the decision and get member approval.

Obtaining a state-issued Certificate of Dissolution

After shareholders or representatives vote to dissolve the company, paperwork must be filed with the state where the company was formed. If the company is licensed to do business in other jurisdictions, it must file paperwork in those states as well.

The Certificate of Dissolution (also known as Articles of Dissolution) filing procedure varies by state. Some states require you to file paperwork before notifying creditors and settling claims, while others require you to file after those steps have been completed.

Before a Certificate of Dissolution may be filed in some jurisdictions, the corporation must first obtain tax clearance. Any back-taxes owed by the company or LLC must be charged first in these situations.

To learn more, contact your online incorporator, registered agent, or Secretary of State's office.

Prepare and file federal, state, and local tax returns

Despite the fact that you are ceasing activities, your tax responsibilities do not end immediately. The IRS, as well as the state and local taxing authorities, must be notified of the business closure. A business closing checklist is available on the IRS website, which lists the appropriate forms and provides links to additional state and local requirements. If you have staff, keep in mind your payroll reporting responsibilities. Be sure to talk to your accountant or tax advisor about your specific needs.

Notify creditors that your company is closing down.

You must send a letter to all of your company's creditors, explaining:

That your business or limited liability company (LLC) has been dissolved or has filed a notice of intent to dissolve.

Creditors must submit their claims to the following address:

  • A list of the data that needs to be included in the argument
  • The deadline for filing claims has passed (often 120 days from the date of the notice)
  • A statement that if claims are not submitted by the deadline, they will be barred.

Your state can allow creditors who were unknown to the company at the time of dissolution to file claims. You may be forced to publish a notice of your company's demise in the local newspaper. If you're unsure, consult a Business Law Attorney to find out what your state needs.

Resolving the claims of creditors

Your corporation has the option of accepting or rejecting creditor claims. Accepted claims must be paid, or satisfactory repayment agreements must be made with creditors. A borrower, for example, will agree to settle the claim for a lower amount (such as 80% ) than the original amount. You must notify creditors in writing that their claims have been denied by your company. Make sure you hire a Business Law Attorney to help you with the procedure and to educate you on the applicable laws in your state.

Distribute the assets that remain.

Following the payment of claims, the remaining assets may be allocated to the company's owners in proportion to their ownership stake. For instance, if you own 80% of the company and your brother owns 20%, you will receive 80% of the remaining assets. The IRS must be notified of any distributions. If your company has several stock groups, the process for distributing assets to these shareholders is usually outlined in the corporate bylaws. Contact an accountant or tax advisor for more information on delivery and the on-going contingent liabilities.

Find A Business Litigation Attorney in California is a California Bar Association Certified Free Attorney Referral Service that can refer you to an experienced California Business Law Attorney best fit to handle their unique case. No matter the size of the business you want to start or dissolve, it is best that you are helped by an expert on the legal side of things.

You can contact us through our 24/7 live chat (or complete our case submission form) for a free initial case consultation.