Ownership Entities

Sole Proprietorship

A sole proprietorship is the simplest form of business ownership and is most commonly associated with small enterprises. It consists of one individual (natural person), with no partners. This individual derives all of the net profit from the operation of the business and assumes all responsibility for the business debts.

General Partnership

A partnership arises when two or more persons agree to carry on a business for profit. Such agreement may be either expressed (such as through a formal written agreement) or implied (such as through a verbal agreement). The partners are co-owners of the business and have joint control over its operation and the right to share in its profits. Typical partnerships include those comprised of a husband and wife, two or more family members (such as a brother and sister), or two unrelated individuals. Such a partnership is commonly referred to as a general partnership (as opposed to a limited partnership). The Department does not recognize the partnership as a legal entity for the purposes of issuance of a license; rather it recognizes the individual partners who are the true parties in interest in the business.

Limited Partnerships (LP’s)

A limited partnership is an entity consisting of one or more general partners and one or more limited partners. Limited partnerships were created to allow investor partners not involved in the operation of a business, to share in the profits or losses of a business commensurate with their financial contributions. They also serve to create limited liability for their limited partners.

A domestic (California) limited partnership is created by an agreement, and comes into existence when a Certificate of Limited Partnership, Form LP-1, is filed with the Secretary of State. It must also enter into a limited partnership agreement. A foreign (out of state) limited partnership must register with the Secretary of State before transacting intrastate (within California) business; Form LP-5.

Once the limited partnership has been created, the laws treat the general partner(s) exactly the same as any partner in an ordinary partnership. The general partner(s) assume(s) management responsibility of the partnership and as such have full personal liability for all debts of the partnership.

The limited partners contribute cash (or other consideration) and own an interest in the firm, but do not generally participate in the management or control of the partnership. As a result, they are treated merely as investors. The limited partners are not personally liable for partnership debts beyond the amount of their initial investments. Generally, as long as the limited partners’ activities are confined to capital investment, their liability is limited to their capital contribution and their personal assets are not subject to partnership obligations.

The capital of the partnership means the total amount of money invested by the limited partners. Each limited partner is assigned a percentage of interest in the profits and losses of the partnership based upon the amount of their investment. For example, if limited partner Sam Jones invests $10,000.00 into the XYZ Limited Partnership, and the total capital of the partnership equals $100,000.00, Sam would own a 10% interest in the capital of the partnership. However, he may only be entitled to a lesser amount of the profits according to the partnership agreement. The general partner may be entitled to more than 10% of the profits, yet not hold a 10% capital interest. Section 23405.1 defines an interest to be reported and qualified as 10% of the capital or profits.

Corporations

A corporation is an artificial person or legal entity created by or under the authority of laws of the State. It is an artificial being contemplated under the law as having a personality and existence distinct from that of its officers, directors and stockholders. A corporation is vested with the capacity of continuous succession, so long as its franchise (permission to conduct business in this state) is not suspended, irrespective of changes in its officers, directors or stockholders.

The stockholders are, in effect, the owners of the corporation and the controlling factor in that they appoint or elect the directors and, via voting rights, set corporate policy. One director is sufficient if so provided in the Articles of Incorporation. (Corporations Code, Section 212.)

The directors appoint the officers of a corporation. There shall be a chairperson of the board or a president or both, a secretary, a chief financial officer and such other officers as shall be stated in the bylaws or determined by the board of directors. Offices may be held by the same person unless the articles or bylaws provide otherwise. (Corporations Code, Section 312.)

The officers are charged with the management and general conduct of the corporation and its business. They are responsible to the directors who, in turn, are responsible to the shareholders. Shareholders or other persons may be directors or officers, or both.

Limited Liability Company

A limited liability company is an artificial person or legal entity created by or under the authority of laws of this State. It is an artificial “being,” contemplated under the law as having a personality and existence distinct from that of its officers, managers or members. A limited liability company is vested with the capacity of continuous succession until its dissolution date, so long as its franchise to operate issued by the State of California is not suspended, irrespective of changes in its officers, managers or members.

Although similar to a corporation, there are differences between a corporation and a limited liability company. Unlike corporations which require officers to conduct its business and have stockholders which own the company, a limited liability company need not have officers to conduct its business affairs. It has no stockholders, but is instead owned by its members who hold membership interests instead of stock.

A domestic limited liability company is formed and begins its existence when one or more persons execute and file articles of organization with the Secretary of State using Form LLC-1, Articles of Organization. The articles of organization set forth the name of the limited liability company, which must contain the words “limited liability company” or abbreviations “LLC” or “L.L.C.” as the last words in the name of the limited liability company; the latest date on which the limited liability company is to dissolve; the name and address of the initial agent for service of process; and a statement that the limited liability company will be managed by one manager, by more than one manager, or by all of its members.

The articles of organization may contain other provisions including, but not limited to, a provision limiting the business the limited liability company may engage in; provisions governing the admission of members; a statement of any limitations on the authority of the manager or managers or members of the limited liability company; or the names of the manager or managers. The managers need not be natural persons and do not have to be members of the limited liability company. The person or persons who execute and file the articles may, but need not, be members of the limited liability company.

If the articles of organization contain the statement that the limited liability company is managed by a manager or managers, then no member, acting in the capacity of a member, is an agent of the limited liability company and cannot bind or execute any document or other instrument on behalf of the limited liability company.

Either before or after the filing of the articles of organization, the members of the limited liability company shall enter into an operating agreement, which will outline the organization and conduct of the business affairs of the limited liability company The agreement may provide for the appointment of officers, including, without limitation, a chairperson or a president, or both, a secretary, a chief financial officer, and any other officers with such titles, powers, and duties as shall be specified in the articles of organization or operating agreement, or determined by the managers or members. An officer may, but need not, be a member or manager of the limited liability company, and any number of offices may be held by the same person.

Trust

A trust is a right of property, real or personal, held by one party for the benefit of another. Essentially, there are three parts to the trust. The trustor(s), who places the property into the trust, the trustee, who manages the trust, and the beneficiary, who will eventually receive the property in the trust.

A trust is a legal entity, like a corporation, in that it earns income, pays taxes, and distributes earnings. The most common form of trust that we see is the revocable living trust.

The trustee administers the trust, making investment decisions, paying taxes, and distributing the income. The trustee also has the right to manage, buy, or sell assets within the trust.