Common Types of Business Entities in California

If you are planning to start a business in Orange County, California, you need to decide on what type of business entity will it be. There are various kinds of business entities in California. The most common types include limited liability companies (LLC), corporations, sole proprietorships, and partnerships. In this article, learn about the basics of forming a general partnership business structure in California.

What is a Partnership?

In California, there are two types of partnerships. There is a general partnership, which we will discuss in this article. There is also the option of a limited partnership, which we will discuss in another article. There are subsets of limited partnerships that apply in specific situations. These are limited liability partnerships.

A general partnership is a business structure wherein there are two or more people who agree to do business together for profit. The decision between the parties to form a general partnership does not necessarily need a written agreement. Moreover, there is no need to file any form, documents, or registration requirements to the California Secretary of State to create a general partnership. It is only important that general partnerships comply with registration, filing, and tax requirements that are applicable to all types of businesses.

When starting a general partnership in Orange County, California, there are steps that you need to follow and they are as follows:

Step One: Choose a General Partnership Business Name

Choosing a name for your business is one essential aspect of starting it. Many general partnerships in Orange County, CA use the surnames of the individual partners in the company as their business name or create a totally new one. If you do create a brand new name for the business, make sure that is not the same or similar to any existing company in your line of business. Businesses that choose a name similar to their competitors generally find themselves in trouble with common law and federal trademark law protections. You can check for the availability of a business name by running a search on either the California Secretary of State database or on the U.S. Patent & Trademark Office database.

Step Two: Draft a General Partnership Agreement and Have it Signed

Although a written agreement is not a requirement in order to form a general partnership in California, it is highly recommended that you draft one and have it signed. A written partnership agreement helps make sure that there are no misunderstandings between you and your business partners. A properly drafted partnership agreement will also be your guide on how to handle certain situations and problems that might arise in your business. A general partnership agreement contains a lot of things; to name a few: the details of each partner’s contributions to the company; the allocations of profits; losses and draws; each partner’s role assignment and managerial responsibilities; voting rules for decision making; rules in accepting new partners; and rules in the withdrawal or death of a partner.

There have been many cases in California where well-intentioned and honest partners still found themselves in a legal battle all because they did not have a proper written agreement for their general partnership. To make sure that your written agreement is drafted well, have your business attorney assist you in preparing it. Written partnership agreements can always be amended later on if there are any changes that need to be made.

Forming Partnerships in CA

Step Three: Obtain the Necessary Licenses, Permits, and Clearances

All businesses should comply with all legal requirements when they begin so that they avoid any unnecessary legal problems later on. Your company may need to get business or professional licenses depending on the nature of your business. California provides a comprehensive database of professions that need a license.

Besides licenses, other local regulations need to be complied with, such as building permits and zoning clearances that apply to your business.

Obtain a seller’s permit. You need a seller’s permit if your business sells tangible goods within the state of California. You can get a seller’s permit through the California State Board of Equalization. Visit their website for more information. If you need help, contact a qualified California business lawyer.

Step Four: Obtain an Employer Identification Number

More often than not, general partnerships need to have employees, and if you’re one of those that plan to have employees, you need to obtain an Employer Identification Number (EIN). All general partnerships in California that have employees are required to report wages to the IRS using their EIN. An EIN is a 9-digit number issued by the IRS to keep track of businesses in California. Registering for an IRN can be done online at the IRS website.

Many business lawyers in Orange County, California recommend that general partnerships obtain an EIN even if they don’t have employees because many banks require an EIN for a business to open an account. Having an EIN reduces the risk of identity theft. Moreover, businesses in California are required to report sales and use taxes along with other reports related to employees. An EIN will be of good use when you register your company to report through the California Board of Equalization.

It’s also important to pay your state income taxes. Your state income taxes are collected by the Franchise Tax Board.

Businesses that have employees that are paid $100 USD or more every quarter must report wages and pay employment taxes on a periodic basis. This can be done efficiently by registering through the California Employment Development Department.

Step Five: Open a Bank Account for Your General Partnership Business

All businesses need to have a bank account separate from the owners’ bank accounts. This is to avoid any problems in categorizing financial expenses as personal or business-related. Using the business name that you created and the EIN issued, you can open a bank account with any business bank of your choice.

Step Six: Obtain Worker’s Compensation Insurance

All the partners in a general partnership business structure are personally liable for the debts and obligations that the business may incur. Business attorneys in California strongly recommend a business liability insurance policy for partnerships so that they may have financial protection against unforeseen events. Protect your business and personal assets from lawsuits and other claims that may arise against your business by obtaining adequate business liability insurance.

Step Eight: Report and Pay Taxes Diligently

It is imperative for all general partnerships in Orange County, CA to report and pay their taxes diligently. What to report depends on the specific activities of a business. Some businesses are required to report items such as sales tax and use tax. Make sure to register your business with California’s Board of Equalization Business Registration.

Business Attorney in Orange County

Have a Business Attorney to Help You

Whether it is a general partnership or whatever business structure you intend to have for your business, you will surely benefit from having a business attorney assist you in forming it. Competent business lawyers in Orange County, California can help you avoid unnecessary legal problems that might arise in the future.