Filing the initial and the biennial (every two years) Statement of Information recently became much easier for California limited liability companies (LLCs). California LLCs can now file their Statements of Information online. When filing a California limited liability company Statement of Information (SOI) on-line, filers can receive a free PDF copy of the filed SOI.
Earlier this year, I posted a blog entry about the legal issues faced by Sacramento small business lawyers and their clients when the client wants to sell their business. It seems only natural to write a companion piece explaining the legal issues faced by a client who wants to purchase a business. Although some of the issues are somewhat similar, buyers and sellers in a business sale can have vastly different goals and perspectives in the process. As such, the best business lawyers are able to wear both hats based on their client’s end of the transaction.
When a Sacramento small business attorney wears the business purchaser hat for her client, there are some particular pieces of advice to impart. The first and most important thing to consider is the particular structure of the purchase deal. There are two main types of purchase structures: an entity purchase and an asset purchase.
An entity purchase is the more complex and extensive of the two purchase structures. In order to understand the mechanics of an entity purchase, a client must be able to distinguish the difference between a business itself and the legal entity that operates the business. Both of those must also be distinguished from the existing business owner. The business owner owns and operates the business entity, and the business entity operates the business. By way of example, a business owner named Mario may own a legal entity known as Mario’s Pizza, LLC. His limited liability company may operate two pizza joints that do business as Mario’s Pizza Parlor and Mario’s Pizza Palace.
Entrepreneurs who consult a California small business attorney for business formation advice sometimes neglect to ask about what may seem to be the most elementary consideration for a fledgling business: what to name it. In today’s modern age, and in the incredibly complex business environment of California, naming your start-up business may not be as easy as tacking on “Inc.” or “LLC” to your word or phrase of choice.
According to the United States Census Bureau, there are more unique business entities in existence in California than in any other state in the union. In fact, more than 12 percent of all unique business entities across the country call California home. The lesson in these statistics is that an entrepreneur in California is far more likely than anyone else in the country to share an idea for a business name with another existing business. Sharing a business name with another business entity is not only illegal, but also detrimental to your efforts to distinguish your business’s products or services from those of other businesses in your market.
With this in mind, experts suggest that the owner of a California start-up business should come up with several different words or phrases and view them merely as candidates for the business’s name. Once the business owner is convinced that he or she would be satisfied with any of those several names, he or she should contact a California business lawyer for a consultation. A business lawyer will know the proper State databases to search in order to determine whether your prospective business names have been taken. Your lawyer can also help apply specific State rules about what constitutes a substantially similar business name. For instance, you may not be permitted to incorporate at “Haircuts, LLC” if “Haircuts, Inc.” or “Haircuts Co.” already exists. In a similar vein, something like “Haircutz” may be viewed as too similar to an existing name.
So you’ve take the plunge. You’ve started your own business. Perhaps you’ve gone the traditional route and purchased or leased a Sacramento-area storefront. Or perhaps you’ve capitalized on the infinite merchant opportunities that the internet provides. Perhaps your side source of income has grown into a full-time gig.
No matter the case, the prudent, established Sacramento business owner knows that entity formation is in his or her business’s best interest. But perhaps your business is in its infancy. Perhaps you are not yet established among Sacramento consumers. Perhaps you are unsure if you should incorporate your California business. An experienced Sacramento business entity lawyer can help you determine whether your business is a candidate for incorporation.
The Advantages of Business Entity Formation
The advantages of forming a business entity are numerous.
First and foremost, incorporating your business adds instant legitimacy in the eyes of your consumers, vendors, and business partners. An incorporated business is more likely to secure a commercial mortgage loan – and at a better interest rate – than an unincorporated business. Products and services from an incorporated business carry with them an implicit quality that products and services from an unincorporated business do not. Anyone can sell produce from the back of a pickup truck and makes some money on the side. But the reality is that today’s modern consumers are more likely to purchase produce from “Mom and Pop’s Produce Market, Inc.” because the full legal entity title implies structure and legitimacy.
Incorporating under such a name also prevents another merchant from operating under the same name, protecting your business’s profitability by ensuring name and brand recognition in the market.
Another primary reason to incorporate is to separate one’s personal assets from the assets of the business. The main implication of this separation appears on the business owner’s income taxes. Suppose your business brings in gross receipts totaling $100,000 in a year. But suppose it cost you $60,000 to maintain your business’s daily operations over the course of the year. If your business is an incorporated entity, you can deduct the business expenses, such as rent, mortgage, employee wages, and energy bills before allocating income to the owner. In this example, the business owner pays income taxes on the $40,000 paid from his business rather than on the $100,000 in gross receipts. Your business does not evade taxes altogether, but generally small businesses are taxed at vastly different rates than personal income.
In the same vein, there are legal liability advantages to the separation of one’s personal assets from business assets. Suppose a negligent employee drops a banana peel on floor of Mom and Pop’s Produce Market. If a customer is injured as a result of slipping on the banana peel, the customer may only sue for assets tied up in the business, and may not sue the business proprietor personally.
This list is by no means exhaustive, but the final advantage worth noting here is that corporate entities exist perpetually, as opposed to sole proprietorships and partnerships that automatically dissolve when one person leaves. The advantage of perpetual existence is that the business entity may exist even when its creator is no longer in the picture. Corporate entities may be bought and sold, or even passed down to one’s next of kin.
What options are available to me?
Generally speaking, a business owner may have several options in entity formation. He or she may incorporate under a host of business suffixes, including “Inc.”, “LLC”, “LP”, “LLP”, and “PC”, among others. There are many considerations that go into deciding which entity type to choose, including the realities of your geographic market. Sacramento business owners should consult a Sacramento business entity attorney, who can help determine which of these entity types are right for your situation.
See Our Related Blog Posts: