How To Start A Business In Los Angeles
Business attorney’s business startup guide for entrepreneurs to open a business in Los Angeles.
Starting a business in Los Angeles help improve our community by creating jobs for workers to support their family. In this article, our Los Angeles business attorney discusses how to start a business in Los Angeles as follows:
Step 1: Select a Business Structure
- Sole Proprietorship
In Los Angeles, a sole proprietorship is a type of business entity that is owned and operated by a single individual. It is the simplest and most common form of business structure. As a sole proprietor, you have complete control over your business and make all the decisions. Let’s consider some key characteristics of a sole proprietorship as it exists in Los Angeles.
First, such a business is owned by a single individual, known as the sole proprietor. There are no partners or shareholders involved. As a sole proprietor, you, the business owner, have unlimited personal liability for the business’s debts and legal obligations. This means that your personal assets may be at risk if the business faces financial difficulties or legal issues.
The income and expenses of the sole proprietorship are reported on the owner’s personal tax return. The business itself does not file a separate tax return. The owner is responsible for paying income taxes and self-employment taxes on the business profits.
A sole proprietorship in California can operate under the owner’s legal name or a fictitious business name (also known as a “DBA” or “doing business as” name). If a fictitious business name is used, it must be registered with the county clerk’s office in the county where the business is located.
Unlike some other business entities, such as corporations or limited liability companies (LLCs), a sole proprietorship does not need to be formally registered with the state. However, certain professions and activities may require specific licenses or permits.
As the sole proprietor, you have full decision-making authority over the business. You can hire employees, enter into contracts, and make all other business decisions without the need for consultation or approval from others.
It is important to note that while a sole proprietorship is relatively easy to set up and operate, it may not provide the same level of legal protection and credibility as other business structures like LLCs or corporations. Therefore, it is recommended that you consult with a legal or financial professional to understand the implications and consider your specific circumstances before deciding on the appropriate business structure.
- General Partnership
In Los Angeles, a general partnership is a type of business entity formed by two or more individuals who come together to carry on a business for profit. It is a common and relatively simple form of business structure.
A general partnership is owned by two or more partners who contribute resources, such as money, property, skills, or labor, to the business. The partners share in the profits, losses, and management responsibilities of the partnership.
Each partner in a general partnership has unlimited personal liability for the partnership’s debts and obligations. This means that partners’ personal assets may be at risk to satisfy business debts or legal claims against the partnership.
While not required by law, it is highly recommended that partners establish a partnership agreement. This agreement outlines the rights, responsibilities, and obligations of each partner, including profit and loss sharing, decision-making authority, and procedures for resolving disputes.
A general partnership in California does not pay income taxes at the partnership level. Instead, the partnership files an informational tax return (Form 1065) to report its income, deductions, and distribution of profits to the partners. Each partner then includes their share of the partnership’s profits or losses on their individual tax returns.
If registered with the county clerk’s office, a general partnership in California can operate under the partners’ individual names or a fictitious business name (DBA). If a fictitious business name is used, it must be registered to inform the public of the individuals conducting business under that name.
Upon the occurrence of specific events, such as the withdrawal or death of a partner, expiration of a fixed term stated in the partnership agreement, or the mutual agreement of the partners, a general partnership can be dissolved. It is advisable to have dissolution procedures outlined in the partnership agreement to handle these situations.
Unless otherwise stated in the partnership agreement, decisions in a general partnership are usually made on an equal basis, with each partner having an equal say in the management of the business. However, the partnership agreement can provide for different decision-making structures if desired.
It is important to note that a general partnership, like a sole proprietorship, does not provide limited liability protection to the partners. Therefore, personal assets may be at risk. If partners desire limited liability protection, they may consider forming a different type of business entity, such as a limited liability partnership (LLP) or a limited liability company (LLC).
As the legal and financial aspects of partnerships can be complicated in nature, it is best to consult with an attorney or other experienced professionals to ensure compliance with relevant laws and to establish appropriate partnership agreements.
- Limited Partnership
A limited partnership (LP) is a type of business entity that consists of one or more general partners and one or more limited partners. A limited partnership must have at least one general partner who assumes full management responsibility and has unlimited personal liability for the partnership’s debts and obligations. General partners have control over the day-to-day operations and decision-making of the partnership.
Further, a limited partnership must also have one or more limited partners. Limited partners contribute capital or assets to the partnership but have limited management involvement. Their liability is generally limited to the extent of their capital contributions. Limited partners typically do not participate in the partnership’s daily operations or decision-making.
General partners have unlimited personal liability for the partnership’s debts and obligations, while limited partners’ liability is generally limited to their capital contributions. However, limited partners risk losing their limited liability protection if they actively participate in the management of the partnership or make certain types of decisions.
A limited partnership is typically governed by a partnership agreement, which outlines the rights, duties, and responsibilities of the partners. The partnership agreement may include provisions regarding profit and loss sharing, decision-making authority, capital contributions, and other relevant matters.
To establish a limited partnership in California, a Certificate of Limited Partnership must be filed with the California Secretary of State. This document includes information about the general partners, limited partners, and the partnership’s name and address.
Similar to general partnerships, limited partnerships do not pay income taxes at the partnership level. Instead, the partnership files an informational tax return (Form 1065) to report its income, deductions, and distribution of profits to the partners. Each partner includes their share of the partnership’s profits or losses on their individual tax returns.
A limited partnership can be dissolved by various events, such as the withdrawal or death of a general partner, the unanimous consent of the partners, or as specified in the partnership agreement. Dissolution procedures should be outlined in the partnership agreement to handle these situations.
It is important to consult with an attorney or other qualified professionals to ensure compliance with the legal requirements and to establish an appropriate partnership agreement for a limited partnership in California.
- Limited Liability Company
A limited liability company (LLC) is a type of business entity that combines the limited liability protection of a corporation with the flexibility and tax advantages of a partnership.
An LLC is owned by one or more members, who can be individuals, corporations, other LLCs, or even foreign entities. Unlike corporations, LLCs do not have shareholders or stock.
The primary advantage of an LLC is that its members have limited personal liability for the company’s debts and legal obligations. This means that the members’ personal assets are generally protected from business liabilities, and their risk is limited to the amount they have invested in the LLC.
To establish an LLC in Los Angeles, you must file Articles of Organization with the California Secretary of State. This document includes information about the LLC’s name, address, registered agent, and the names and addresses of its members or managers.
While not required by law, it is highly recommended that an LLC have an operating agreement. This agreement outlines the rights, responsibilities, and operating procedures of the LLC, including the management structure, profit and loss sharing, voting rights, and procedures for admitting or removing members.
By default, an LLC in California is treated as a “pass-through” entity for tax purposes. This means that the LLC itself does not pay income taxes. Instead, the profits and losses of the LLC are “passed through” to the members, who report them on their individual tax returns. However, an LLC can elect to be taxed as a corporation if desired.
An LLC in California must include the words “Limited Liability Company,” “LLC,” or “L.L.C.” in its name. The name should be distinguishable from other registered entities in the state.
An entity of this type can be managed either by its members (referred to as a member-managed LLC) or by appointed managers (referred to as a manager-managed LLC). The management structure is typically defined in the operating agreement. Upon the occurrence of specific events, such as the unanimous consent of the members, expiration of a specified term, or the occurrence of certain triggering events outlined in the operating agreement, an LLC may be dissolved.
It is important to note that while an LLC provides limited liability protection to its members, certain actions or personal guarantees may expose members to personal liability. Consulting with an attorney or other qualified professionals is advisable to ensure compliance with relevant laws and to establish an appropriate operating agreement for your specific LLC in Los Angeles.
A corporation is a legal entity that is separate and distinct from its owners. It is formed by filing the necessary documents with the California Secretary of State. Corporations provide limited liability protection to their shareholders, meaning that the personal assets of shareholders are generally shielded from the corporation’s debts and liabilities. In California, there are several types of corporations, including C corporations, S corporations, and professional corporations.
- C Corporation (C Corp):
- A C corporation is the standard type of corporation and the default choice if no other election is made.
- It can have an unlimited number of shareholders, and the ownership can be held by individuals, other corporations, partnerships, or other entities.
- C corporations are subject to double taxation. The corporation itself pays taxes on its profits at the corporate tax rate, and then shareholders pay taxes on any dividends or distributions received.
- C corporations offer various benefits, including flexibility in ownership, the ability to issue multiple classes of stock, and the potential for raising capital through the sale of stock.
- S Corporation (S Corp):
- An S corporation is a special tax status that can be elected for certain eligible corporations to avoid double taxation.
- To qualify for S corporation status, the corporation must meet specific criteria, such as having no more than 100 shareholders, all of whom must be individuals or eligible trusts, and there can only be one class of stock.
- An S corporation is a pass-through entity for tax purposes. It does not pay federal income taxes at the corporate level. Instead, the corporation’s income, deductions, and credits are passed through to the shareholders, who report them on their individual tax returns.
- Shareholders of an S corporation are taxed on their share of the corporation’s income, regardless of whether it is distributed as dividends. This can result in potential tax savings compared to a C corporation.
- Professional Corporation (PC):
- A professional corporation is a specific type of corporation that is formed by professionals in certain licensed fields, such as lawyers, doctors, accountants, or architects, to provide professional services.
- The formation and operation of professional corporations in California are subject to specific regulations and requirements set forth by professional licensing boards.
- Professional corporations typically offer limited liability protection to their shareholders, shielding them from personal liability for the professional malpractice of other shareholders. However, shareholders may still be personally liable for their own professional negligence or misconduct.
It is important to note that the specific requirements, regulations, and tax implications when starting a business in Los Angeles. You should not hesitate to seek professional advice from attorneys, accountants, or business advisors when considering forming or operating a corporation in Los Angeles.
Step 2: Decide On A Business Name
Naming a business in California involves several steps, including searching and registering the name with the appropriate authorities and considering the availability of a domain name. Here is a breakdown of the process and some tips for coming up with a good name:
- Brainstorm and Research:
- Start by brainstorming potential names for your business. Consider the nature of your business, your target audience, and the image you want to convey.
- Research your competitors and similar businesses to ensure your name stands out and is distinct.
- Look for names that are memorable, easy to spell, and representative of your brand or industry.
- Search for Name Availability:
- Conduct a thorough search to check if your desired business name is available in California. You can search the California Secretary of State’s business name database to see if the name is already in use by another registered entity.
- Additionally, search for trademarks or service marks with the U.S. Patent and Trademark Office to ensure your proposed name doesn’t infringe on an existing registered mark.
- Register the Business Name:
- If your desired name is available, you can register it with the California Secretary of State. The specific registration process may vary depending on the type of business entity you’re forming (ex: corporation, LLC, partnership).
- For corporations, you’ll include the chosen name in the Articles of Incorporation. For LLCs, the name is included in the Articles of Organization.
- It’s important to note that registering the name as a business entity doesn’t automatically grant trademark rights. If you want exclusive use of the name, consider consulting a trademark attorney for further guidance.
- Check Domain Name Availability:
- In today’s digital age, it is crucial to have a matching or related domain name for your business website. Check the availability of domain names that align with your business name.
- Use domain registrar websites, such as GoDaddy or Namecheap, to search for and purchase domain names that are relevant to your business.
Tips for Coming Up with a Good Name:
- Keep it simple, memorable, and easy to spell.
- Consider the longevity and scalability of the name as your business grows.
- Ensure it aligns with your brand, values, and target audience.
- Avoid using generic or commonly used words that may make it harder to stand out.
- Conduct a thorough search to avoid potential trademark conflicts.
- Test the name with potential customers, partners, or friends to gather feedback.
- Consider seeking advice from branding or naming professionals if you need assistance.
Remember, the naming process is crucial, as it forms the foundation of your business’s identity and can impact your marketing efforts. Taking the time to research and select a suitable name is an important step towards establishing a successful business in California.
Decide if you need a fictitious business name
In Los Angeles, a fictitious business name is a legal term used to refer to a name under which a business operates that is different from the legal name of the individual or entity owning the business. It is also commonly known as a “doing business as” (DBA) name. Registering a fictitious business name is a requirement in Los Angeles County and serves to provide transparency and public awareness regarding the true ownership of a business.
Here are some key points to understand about fictitious business names in Los Angeles:
- Requirement: If you operate a business under a name other than your own legal name or the exact legal name of your business entity (such as a sole proprietorship or partnership), you are generally required to register that name as a fictitious business name in Los Angeles County.
- Registration Process: To register a fictitious business name, you must file a Fictitious Business Name Statement with the Los Angeles County Registrar-Recorder/County Clerk’s Office. The statement typically includes information such as the name and address of the business, the name(s) and address(es) of the owner(s), and the duration of the business.
- Public Notice: Once registered, the fictitious business name is published in a local newspaper to provide public notice of the business’s true ownership. This helps to prevent fraud or confusion by informing the public of the individuals or entities operating under the fictitious name.
- Protection: Registering a fictitious business name does not grant exclusive ownership rights or legal protection to the name itself. It primarily serves as a disclosure requirement to maintain transparency and avoid misleading the public.
- Renewal: Fictitious business name registrations in Los Angeles County are typically valid for five years. It is important to renew the registration within the specified timeframe to keep the information current and avoid penalties or cancellation.
- Compliance: Operating a business under an unregistered fictitious name or failing to renew the registration can lead to penalties and legal consequences. It’s important to comply with the requirements of Los Angeles County to ensure proper registration and ongoing compliance with the fictitious business name laws.
It is advisable to consult the Los Angeles County Registrar-Recorder/County Clerk’s Office or seek legal advice for specific details and guidance regarding the registration process and requirements for fictitious business names in Los Angeles.
Step 4: Draft an Operating Agreement or Bylaws for the Company
An LLC Operating Agreement and Corporate Bylaws are legal documents that outline the internal structure, rules, and operating procedures of a business entity. The following is an overview of each document and their relevance when starting a new business in Los Angeles:
- LLC Operating Agreement:
- An LLC Operating Agreement is a legal document that outlines the ownership, management, and operational details of a limited liability company (LLC).
- It typically covers aspects such as the members’ rights and responsibilities, profit and loss sharing, voting rights, decision-making processes, management structure, and the process for admitting or removing members.
- Although not required by law in California, having an LLC Operating Agreement is highly recommended. It provides clarity, protects the interests of the members, and can help prevent misunderstandings or disputes among the owners.
- Even if your LLC has a single member, having an Operating Agreement can be beneficial for clarifying the separation between personal and business assets and reinforcing the limited liability protection provided by the LLC structure.
- Corporate Bylaws:
- Corporate Bylaws are a set of rules and procedures that govern the internal operations of a corporation.
- Bylaws typically address matters such as the composition and roles of the board of directors, shareholder meetings, voting procedures, dividend distributions, the issuance and transfer of stock, and other corporate governance matters.
- Corporate Bylaws are essential for corporations and are required by law in California. They provide a framework for the corporation’s decision-making, governance structure, and relationships among directors, officers, and shareholders
- Bylaws help ensure transparency, consistency, and legal compliance in corporate operations. They also demonstrate that the corporation is being run in accordance with established rules and regulations.
While an LLC Operating Agreement is not legally required in California, having one is highly recommended for LLCs. It can provide legal protection, outline the internal operations, and define the rights and obligations of the members. Corporate Bylaws, on the other hand, are necessary for corporations in Los Angeles and the rest of California. They are mandated by state law to establish the rules and procedures for operating the corporation.
It is important to consult with an attorney or legal professional familiar with California law when drafting an LLC Operating Agreement or Corporate bylaws to ensure compliance with relevant regulations and to tailor the documents to your specific business needs.
Step 5: Obtain An EIN
An Employer Identification Number (EIN) is a unique nine-digit identification number assigned by the Internal Revenue Service (IRS) to businesses, including sole proprietorships, partnerships, corporations, LLCs, and other entities for tax filing and reporting purposes. Also referred to as a Federal Tax Identification Number (FTIN), an EIN is used to identify a business entity in its interactions with the IRS and other government agencies.
Here are some key points to understand about EINs:
- Purpose: An EIN is primarily used for tax-related matters, including filing tax returns, paying taxes, and fulfilling other federal tax obligations.
- Business Identification: The EIN serves as a business’s identification number, similar to how an individual has a Social Security Number. It helps distinguish the business entity for tax purposes.
- Unique and Permanent: Each EIN is unique to a specific business entity and remains assigned to that entity throughout its existence. It is not transferable to another entity.
- Obtaining an EIN: Businesses can apply for an EIN from the IRS at no cost. The application can be submitted online, by mail, or by fax. The IRS provides a simplified online application process, which is typically the fastest way to obtain an EIN.
- Uses of an EIN: In addition to federal tax-related matters, an EIN may be required for various business activities, such as opening a business bank account, hiring employees, applying for certain licenses or permits, and conducting certain financial transactions.
- Structure: An EIN is a nine-digit number formatted as XX-XXXXXXX. It is important to provide the correct EIN on all tax returns, forms, and correspondence with the IRS.
- Changing or Canceling an EIN: In general, an EIN is assigned to a specific business entity and does not change, even if the business name or ownership structure changes. However, certain circumstances, such as bankruptcy or the sale of a business, may require the cancellation of an EIN.
Obtaining an EIN is an essential step for businesses to establish their tax identity and comply with federal tax obligations. It is recommended to consult the IRS or a tax professional for guidance on the EIN application process and its specific requirements for your business.
Step 6: Choose A Registered Agent
A registered agent, also known as a resident agent or agent for service of process, is an individual or entity designated by a business to receive important legal and official documents on behalf of the business. The registered agent acts as a point of contact between the business and the state government, ensuring that the business receives essential communications in a timely and reliable manner.
In many jurisdictions, including the United States, businesses are legally required to designate a registered agent when forming a business entity. This requirement ensures that there is a reliable and official point of contact for the business within the jurisdiction.
The primary role of a registered agent is to receive and forward important documents and legal notices on behalf of the business. This may include official correspondence from government agencies, such as tax notices, annual reports, and service of process (legal notices, lawsuits, etc.).
A registered agent must have a physical address within the jurisdiction where the business entity is registered. This address is typically referred to as the registered office. The registered agent must be available during regular business hours to receive documents and ensure their prompt delivery to the business.
Designating a registered agent allows businesses to maintain privacy by keeping their official address off public records. It also ensures compliance with legal requirements to have a physical address within the jurisdiction for receiving legal notices.
Failure to maintain a registered agent or keep the registered agent’s information current can have serious consequences. It may result in missed legal deadlines, loss of good standing, and potential legal complications if the business is unable to receive important notices or respond to legal actions.
Businesses have the option to hire a professional registered agent service. These services specialize in providing registered agent services, ensuring that legal documents are received promptly and securely. This can be particularly beneficial for businesses that operate in multiple jurisdictions or have complex legal requirements.
It is important for businesses to carefully consider the selection of a registered agent and ensure that they fulfill the legal requirements of their jurisdiction. Consulting with an attorney or seeking guidance from a professional registered agent service can help businesses navigate the process and comply with the necessary obligations.
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