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Nov 25

A Santa Cruz Business Lawyer on Business Ownership Structures

Santa Cruz Business Lawyer Silhouettes of global business people meetingA Santa Cruz business lawyer advises that before any decision on how to structure a business, it is helpful to know the available options. The most common business organizations are

  1. sole proprietorships,
  2. partnerships,
  3. limited partnerships,
  4. limited liability companies (LLCs),
  5. corporations,
  6. non-profit corporations, and
  7. cooperatives.

For many new businesses, the best initial ownership option is either a sole proprietorship or, for more than one owner, a partnership.

Sole Proprietorships

A sole proprietorship is a single-stakeholder business not required to register with the state as are LLCs and corporations. Establishment of a sole proprietorship requires nothing formal or special to file or publish, just going into business for yourself.

Legally, a sole proprietorship is its owner; the business and the owner are identical. The owner reports business income and losses on personal tax returns and is liable personally for all debts and obligations of the business.


A partnership is similar to the extent that its ownership is two or more individuals that have not filed documentation of corporate or limited liability status. Formation of a partnership needs no paperwork; the business form begins as soon as the individuals start doing business together. Like sole proprietors, the partners pay taxes on their shares of the business income on their personal tax returns, but each is personally liable for all debts and obligations of the business.

Sole proprietorships and partnerships are sensible where personal liability does not amount to a major concern, as in, for example, a small service business unlikely to be sued and or to borrow much money for operating costs.

Limited Partnerships

Costly and complicated limited partnerships are generally not for the average small businessman, says a Santa Cruz corporate formations lawyer. Limited partnerships are usually creations of one person or entity, the general partner, who solicits investments from limited partners.

The general partner controls the limited partnership’s operations and is personally liable for debts and obligations of the business unless the general partner is a corporation or an LLC. Limited partners have no control over management of the business are not personally liable for any business debts or obligations or claims against it.


Like corporations, LLCs limit personal liability for business debts, obligations, and adverse claims against it, but as to taxes LLCs are more like partnerships. LLC stakeholders report their shares of the business income on their personal tax returns and, as advised by any reputable Santa Cruz corporate formations lawyer, pay taxes on it.

Corporations and LLCs are for business investors who either are at risk of lawsuits by customers, have heavy business debt burdens, or want to shield valuable personal assets from the reach of business creditors.

According to a Santa Cruz corporate formations lawyer, LLCs and corporations are more complicated and costly in formation and operation but worth the additional efforts for some businesses. The main benefit to stakeholders is limited personal liability for business debts, obligations, and court judgments.


Corporations are independent legal and tax entities separate from their stakeholder owners, the officers who manage them, and the directors who control them. Because of this legal separation, says another Santa Cruz corporate formations lawyer, the corporate stakeholders do not report profits from the business on their personal income tax returns; the corporation files its own tax returns reporting such income. Stakeholder owners pay personal income tax only on dividends the corporation pays them. Corporate officers, of course, report and pay taxes on their income from salaries, bonuses, and the like.

Non-profit Corporations

Non-profit corporations pursue business activities for charitable, educational, humanitarian, religious, or scientific purposes. Non-profits raise funds by soliciting public and private grants and donations from individuals and companies. The federal and state governments do not generally tax non-profit corporations on their financial receipts related to their non-profit purposes because of the benefits they contribute to social welfare, nor do the governments tax the donors on the amounts donated, but they are income tax deductions that reduce donor taxable income.


In some businesses, their stakeholders own and operate them democratically. Business organizers might form consumer cooperatives to operate food stores, bookstores, or any retail business, or a worker cooperative might produce and sell arts and crafts. Most states have laws providing for cooperatives and regulating some of their transactions, and in some states stakeholders can file documentation for formal recognition. A Santa Cruz corporate formations lawyer can elaborate on this subject.

Our Santa Cruz Business Lawyer Can Help

San Jose and Santa Cruz innovative companies need experienced and skilled legal counsel to assist with business entity selection and formation, business operations and developments, protection and licensing of business intellectual property, and profitable business sales. In the current economic environment, a business start-up can be unduly difficult and dangerous without good and sufficient preparation. But with proper planning and wise advice a new business properly structured will do well coping with marketplace challenges.

A Santa Cruz corporate formations lawyer can help with

  • Loans, capital, and financing,
  • Employment, purchase and sale, sales representation, and distribution contracts,
  • Corporate reorganizations, mergers and acquisitions, and sales of assets,
  • Stock purchase agreements, and
  • International business activities, foreign licensing agreements, import and export filings, and regulatory compliance.

Anyone in need of a skilled and experienced business lawyer should call The Freed Law Firm at 831–661–0300 or use the easy, simple contact form today to arrange a consultation.