Do you need help choosing the right entity for your San Diego start-up or new business?  Why do you need an entity if you intend to conduct business in San Diego or anywhere in the State of California?  Why shouldn’t you just conduct business as yourself?

The genuine answer is liability.  Any individual who conducts business on their own is personally liable for any debt or liability which arises as a result of the “business” involved.  This means any creditor can come after you (and your spouse) personally for any business debt and that your personal home and assets are exposed in the event of any dispute or lawsuit.

3 Important Issues When Choosing the Right Entity for Your California Business Start-Up

• There are multiple business entities and structures available for your new California business.
• It is important to pick not only the right entity, but completely tailor the operating agreement (LLC) or shareholders’ agreement and bylaws (corporation) to clearly establish how things are to be managed, and to prevent disputes and questions regarding money down the road.
• The corporate veil is the most important reason to have a business entity.  Choosing the right entity ensures you have maximized the opportunity to protect yourself and the investors in your company via the corporate veil.

Choosing the right entity for your San Diego start-up should be based on the nature of the business you intend to conduct.  The experienced San Diego business formation attorneys at the Watkins Firm have advised entrepreneurs and companies here in Southern California for several decades.  There are several specific types of entities including an LLC, a partnership, an S Corporation, a C Corporation and a California Professional Corporation.  Which is best for your unique circumstances?

Generally speaking, a single owner start-up company should most often consider an LLC or an S Corporation.  Both are “flow through” entities which pass income directly through to the owner(s) which would be known as “members” in an LLC or “shareholders” in an S Corporation.  One of the greatest advantages of working with the experienced San Diego business attorneys at the Watkins Firm is the value of the advice we bundle into our competitive rates for start-ups.  Our attorneys have decades of experience and one of the first moments this comes into play is in the “corporate documents” of your new entity.

You see, those who attempt to download their corporate entity start-up forms from some “legal” website get generic, boilerplate forms.  If you want an attorney to answer questions or help you to customize them to fit your unique circumstances and protect your own interests going forward it costs extra.  The “operating agreement” in an LLC and the “shareholders’ agreement” in an S Corporation should be carefully crafted.  There are literally hundreds of optional clauses here.  Choosing the right entity for your new company can be the difference between struggling and tremendous success.  This is especially true if there is more than one owner in your new business.  You want to protect your interests as owners now and in the future.

The primary advantage of a C Corporation is the ability to have a lot of shareholders down the road, interstate and international commerce and/or the ability to customize your year-end date.  Flow through entities operate on a calendar year.  The C Corporation can set whatever date it chooses as it’s year end.  This allows for a lot of creativity when it comes to the realization of income and associated taxation.  For example, a year end of March 31 would allow a high wage earner to delay income to January 2 of this year, and not pay taxes on it until April 15 of the following year.

Finally, A California Professional Corporation is an excellent choice for those who are licensed by the State of California.  It provides some strong advantages for licensed professionals such as doctors, engineers, lawyers, architects, optometrists, pharmacists and psychiatrists.  If you are in the healthcare field, ask how a Management Services Organization or MSO can help to increase not only the quality of the patient experience, but the amount of profit retained at the end of each day.

Pro-Tip: “Well, before we even select an entity, everyone thinking about going into business or in business, you should do what most successful business people do, and that is get a relationship with your lawyer. So you’re doing everything the best way, not just legally, but from a an experienced perspective. You come to your lawyer who talks about the best way for you to go based on your profession and universal things you should have and special things just for you based on your own personal life and your own investment.

One of the most important part of this process is the corporate documents. If you choose a corporation, not all corporations are the same. If you choose a limited liability company, if you choose a partnership, a limited liability partnership, there’s all types of different variations. And then you can get into the nitty gritty based on your profession and all the regs and all the professional license requirements and all of the, depending on the kind of company, their resale license and permits. There’s all kinds of little things that your old business lawyer knows about and can tell you about from the get go. As opposed to you finding out after you’ve made a few mistakes.

This process is a lot more than just picking an entity.  You’re giving birth to a living creature that’s been recognized by the United States Supreme Court. And so what it means is birth is what we call capitalizing. And so you have these corporate documents and you have to decide on how much ownership will be and who owns what. Then you decide about what potential ownership there are. Reserve shares, I mean other ways in which people can own it. And then you capitalize it. Either you capitalize it with cash or you capitalize it with goodwill or a combination or a property. But how you capitalize it can determine whether or not it’s a real company or you have all those protections of corporate veil and creditors and you’re personally shielded. So how you start it is very important. And thinking about it, we’ll send you on the right path to avoiding all kinds of pitfalls and trouble.

And let’s talk about the corporate veil for a minute. Because the whole reason to have an entity is to separate you the person from the legal person of the business.  That’s a big one. I mean, especially if you’re going to be doing some big business, you’re going to have big liability or you could personally not have big liability. And also you can have an entity that can be sold. You can have an entity that can be sold in whole or bring in investors. If you do everything right, you get to do all these things. If you get a big opportunity and you didn’t set your company up correctly, then you can’t have your friend with an extra million dollars say, ‘I’ll invest.” You’ve got to rewrite everything and you’ve got to restructure everything and you’ve got to hope you didn’t make any mistakes. And all of a sudden that opportunity doesn’t look so like a good deal. And that person who’s got the investment money will say, well, this person’s not professional. This person’s not really serious about doing business. And you’ll miss it all because you didn’t pay attention in the beginning when you formed a company.” – Dan Watkins, Founding Partner

The process of choosing the right entity for your San Diego start-up is highly fact and circumstance specific.  Choosing the right business attorney can be one of the most important decisions you make.  Our business attorneys become valuable advisors to our clients.  We invite you to review our podcast Episode 34 – Business Formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.