Once you’ve decided to start a business, how do you make it official? The basic steps you’ll need to take are determined somewhat by which type of structure you will use to organize your business. Once you have chosen your business structure, then you can determine a name and obtain the appropriate business license.
Businesses can be organized in a number of different ways which has its advantages and disadvantages. Some are relatively simple, while others are more complex. You will need to a look at each business structure to learn more about it. You may find it helpful to talk with small business consultants—including an accountant and an attorney—to determine which structure is best for your current and future needs. The four most common types of business structures include the following:
Sole Proprietorship is the most common type of small business. The business has one owner, who is responsible for all aspects of the business and receives all the profits from the business. Legally, the owner IS the business. Income and expenses are reported on the regular individual tax forms, such as the Federal 1040.
Advantages of a sole proprietorship include the following:
- It’s relatively easy and inexpensive to set up or dissolve
- The owner has total control over the business
- The owner receives all the income and determines what happens to it
Disadvantages of a sole proprietorship include the following:
- The owner is solely responsible for any debts or liabilities incurred by the business
- Any benefits—such as medical insurance—may be only partially deductible
- It may be more difficult to raise additional funds from outside sources
Partnership is similar to a sole proprietorship, except the business has 2 or more owners. These owners are responsible for all aspects of the business and receive all the profits from the business. Legally, the owners ARE the business. Income and expenses are reported via the regular individual income tax forms, such as the Federal 1040.
Partnerships can be set up in several ways:
- General Partnership: An agreement among the partners determines how to divide responsibility for management, liability, profits, and loss among the partners.
- Limited Partnership: Most of the partners have limited input and liability for operation of the business.
- Joint Venture: A partnership for a single project or for a limited time.
Advantages of a partnership include the following:
- It’s relatively easy and inexpensive to set up or dissolve
- The owners have total control over the business
- The owners receive all the income and determine what happens to it
- It may be easier to raise additional funds from outside sources than for a sole proprietorship
Disadvantages of a partnership include the following:
- The owners are jointly responsible for any debts or liabilities incurred by the business
- Each owner is legally responsible for the actions of the other partners
- Any benefits—such as medical insurance—may be only partially deductible from tax returns
- Disagreements about any aspect of the business may occur
- The partnership may dissolve if one partner leaves or dies
Corporation is considered a separate, legal entity and is usually chartered by the state in which it is based. The business is separate from those who own it. The corporation is responsible for all aspects of the business and receives all the profits from the business. The owners are shareholders, receiving dividends from any profits earned by the business. They elect a board of directors to oversee the business.
In most cases, corporations are set up as “C” or “regular” corporations. In some cases, a corporation is set up as a “Subchapter S” corporation. This allows shareholders some flexibility in how corporate earnings, profits, and wages are classified, potentially lowering the amount of payroll taxes. A Subchapter S corporation functions much like a partnership.
Advantages of a corporation include the following:
- Shareholders have limited legal liability for the actions and debts of the company
- Employee benefits are deductible from taxes
- It may be easier to raise additional funds from outside sources through the sale of stock
- The corporation does not dissolve when owners change
Disadvantages of a corporation include the following:
- A corporation is more difficult and expensive to start
- Corporations may be more closely monitored by a variety of local, state, and federal agencies
- Dividends paid to shareholders aren’t tax deductible to the corporation; overall taxes may be higher, as shareholders also must pay taxes on the dividends.
Limited Liability Company (LLC)
Limited Liability Company (LLC) combines elements of both a partnership and a corporation. An LLC, therefore, offers limited liability for the owners yet provides the operational and tax flexibility of a partnership. When the LLC is created, a time limit is established for the duration of the company. This limit can be extended upon agreement of the members.
In order to be taxed as a partnership rather than a corporation, an LLC must have no more than two of the following four characteristics of regular corporations:
- The life of the business is continuous
- Liability is limited to the amount of assets
- Management is centralized
- Ownership may be transferred freely
Advantages of an LLC include the following:
- Owners have some limited legal liability for the actions and debts of the company
- The business has more flexibility in its operations than a corporation
- Income is reported via individual income tax forms such as the Federal 1040
Disadvantages of an LLC include the following:
- An LLC can be complicated to create and requires a more formal agreement than a partnership
- If the LLC has more than two of the four characteristics of a corporation stated above, then it will be treated as a corporation for tax purposes, potentially resulting in a higher tax burden
- The LLC dissolves if owners do not agree to extend the life beyond the expiration date
Obtaining a Business License
A business license allows you to do business in the city in which the business will operate. Regulations, procedures, and costs associated with business licenses vary from city to city. If your business is based outside of the incorporated area, then you may not need to obtain a business license from the county in which you do business. However, depending on the nature of your business, you may need other licenses and permits as well.
City Boundary GIS Map – Click Below
Incorporated Cities Located in the County of Monterey
Unincorporated Businesses in Monterey County Requiring a License
Currently, a business license is only required for commercial cannabis businesses. More specifically, a business license is required for all commercial medical cannabis business activity as defined by section 7.90.030 of the Monterey County Code and for all commercial marijuana activity, as defined by California Business and Professions Code section 2601, lawfully conducted within the County of Monterey. It is unlawful for any person to maintain, conduct, operate, or carry on within the unincorporated area of the County any business for which a license is required by Section 7.02, unless a valid license is obtained.
Obtaining State Licenses
To find out if you need permits for your business, visit the CalGOLD website. Enter your type of business and click “continue,” or click on the “all business types” for a complete list. Follow the instructions to obtain a detailed list of the state, county, and city permits you may need and how to apply for them.
Locating and Securing Business Space
Location, Location, Location! The space in which you house and operate your business will be one major factor in whether your business is successful. You need to determine what type of space is right for you.
Leasing Commercial or Retail Space
Leasing commercial space may provide you with more flexibility than purchasing space. Many times, you can lease a small space to begin, and even make arrangements to share common facilities and support staff. In other cases, you may want to lease space in a single building or a single floor of a larger building.
Whichever type of leasing arrangement you consider, start by taking these steps:
- Anticipate your needs. Do you expect the business to grow quickly, and you will probably need space for expansion soon? Are you planning to stay as a small, one-person operation for the foreseeable future? Or do you desire a high-traffic location for a retail business, with a longer lease to ensure your returning customers can easily find you?
- Find out the current going rate for commercial space in your area. That way, you can better judge whether the rental terms offered by the owner are reasonable. If you know, for example, that rates are falling because of an oversupply of office space, you may be able to negotiate better terms.
- Consult with a real estate attorney to make sure the contract is going to meet your needs. An attorney can identify areas of concern that you may not have considered.
A leasing contract should include the following information:
- The amount of rent, including any planned increases (escalations) and the amount of a deposit or whether you can substitute a letter of credit from your bank
- When the lease begins and ends, and how you can renew it
- What services the rent includes, such as utilities
- Who is responsible for maintenance and repairs, taxes, or insurance?
- A full description of the space and a list of any improvements the owner agrees to make
- Written confirmation of verbal information given to you, such as the estimated number of people coming to the shopping center, any restrictions for competing businesses, the approved zoning and uses, and whether the space complies with local, state, and federal requirements (such as the federal Americans with Disabilities Act)
- Whether you can sublease your space, and how either you or the owner may terminate the lease
Owning Commercial or Retail Space
In some cases, you may find that it makes more sense to purchase your place of business. This is particularly true once your business becomes established and you have a good idea of what your expected growth will be.
- Purchasing options vary. For small businesses, for example, you may be able to purchase a “business condominium” similar to residential condominiums. Other businesses join together in a co-op to purchase space.
- Before purchasing commercial or retail space, be sure to speak with a real estate attorney. Purchasing business space is much different than purchasing a home; you need someone with expertise so that you can acquire the property with the best terms possible.
Obtaining a Fictitious Business Name
A unique business name can have a lasting, positive impact on your success and not to be confused with another business. The process of obtaining a business name depends on which type of business structure you have chosen. In most cases, the business name is referred to as a “fictitious” business name or “Doing Business As” (DBA). A company’s DBA is the same as the company’s fictitious business name, and is the name that represents a business.
Does Your Business Require a Fictitious Business Name?
Usually a DBA is filed in the County you will be doing business in. If you will be establishing your business within Monterey County:
- All businesses conducted under any name that does not include ALL owners’ last names within the business name must obtain a Fictitious Business Name Statement.
- All businesses conducted by a corporation, limited partnership (LP), limited liability partnership (LLP), or a limited liability company (LLC) must obtain a Fictitious Business Name Statement.
If the above does not apply to you and your business, then your business may not need a Fictitious Business Name Statement.
If you will be establishing your business within a different county, check local regulations to determine whether or not you will need to obtain a Fictitious Business Statement for your business.