California Law on Corporations Vs. LLPs
Under California law, several types of business entities can be formed in the state. The California Corporations Code contains the law relating to both LLPs (limited liability partnerships) and corporations. A corporation is an entity that has a separate legal personality from its owners. In practice, this means that the liability of the owners (shareholders) is limited to the extent of their investments. An LLP operates as a general partnership, with the added advantage of limited liability for its partners. The Business Entities section of the California Secretary of State's office administers the legal and administrative regulations relating to businesses registered in California.
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Business Purpose
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The nature of the business is fundamental when deciding on the most appropriate form of business entity. In California, only a partnership that engages in practicing public accountancy, law, architecture, engineering or land surveying may register as an LLP. Section 202 of the California Corporations Code provides that a corporation may engage in any lawful act or business, with the exception of the banking business or the trust company business.
Formation
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To form a corporation in California, you must file articles of incorporation with the California Secretary of State. According to Section 200 of the California Corporations Code, the existence of a corporation begins upon the filing of the articles of incorporation and continues in perpetuity unless otherwise stated in the articles. Section 202 provides that the articles must contain certain information, including the corporation name and the number of shares that it may issue. If you want to form an LLP in California, you must file an application to register a limited liability partnership (Form LLP-1) with the secretary of state. Section 16953 of the California Corporations Code provides that the registration application must set out the name of the partnership, the address of its registered office and a brief statement of the business in which it engages.
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Name
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Section 201 of the Corporations Code provides that the name of a corporation must not closely resemble that of another corporation registered in the state of California. The law prohibits certain specific terms, including "bank" and "trustee." The name also must not be likely to mislead the public. Section 6952 states that the name of an LLP must contain the words "Limited Liability Partnership" or one of these abbreviations: "L.L.P.," "LLP," "R.L.L.P" or "RLLP."
Taxation
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The taxation regime differs for corporations and LLPs. In general, a corporation pays tax separately from its shareholders. This means that, in practice, shareholders may end up paying tax twice, first on corporation profits and thereafter on any dividends that they receive. An LLP is not taxed as a separate entity, and therefore the partners only pay tax on the profits that they receive.
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