Once you have decided to start a business, a primary consideration is the type of business entity to form. Tax and liability issues director and ownership concerns, as well as State and Federal obligations pertaining to the type of entity should be considered when making your determination. Personal needs and the needs of your particular type of business should also be considered. Primarily, all Group Homes are to be Non-Profit, Small Family Homes are owner/operated so they are sole proprietorships and all other residential care facilities (ARF, RCFE and ADC’s) are all profit corporations.
The following is a brief overview of the various business structures. The information is intended to provide a basic understanding of the different business structures and is not intended to provide legal advice.
A sole proprietorship is set up to allow an individual to own and operate a business by him/herself. A sole proprietor has total control, receives all profit from and is responsible for taxes and liabilities of the business. If a sole proprietorship is formed with a name other than the individual name, (example John Smith’s Fishing Shop), a Fictitious Business Name Statement must be filed with the County Clerk or County Recorder where the principal place of business is located. If the principal place of business is located outside California, the name will be filed with the Sacramento County Clerk – Recorder. No formation documents are required to be filed with the Secretary of State. Other State filings may be required depending on the type of business.
A CORPORATION (Domestic – Articles of Incorporation/Foreign – Statement and Designation) generally is a legal entity which exist separately from its owners. While normally limiting the owners from personal liability, taxes are levied on the corporation as well as the shareholders. The sale of stocks and bonds can generate more capital and the longevity of the corporation can continue past the death of the owner. A corporation is a legal entity that allows a group of people to pool energy, time and money for profit activities. It acquires legal existence after the founders comply with the state’s incorporation procedures and formalities. The law treats a corporation as a separate “person” distinct from the people who own, manage or operate it. The corporation can enter into contracts, incur debt and pay taxes.
Limited Liability Company
A Limited Liability Company (Domestic – LLC1/Foreign -LLC5) generally offers liability protection similar to that of a corporation but is taxed differently. Limited Liability companies may be managed by one or more managers or one or more members. In addition to filing the applicable documents with the Secretary of State, an operating agreement among the members as to the affair of the Limited Liability Company and the conduct of its business is required. Professional Limited Liability Companies are restricted in California at the time.
A Limited Partnership (Domestic Certificate of Partnership – LP1/Foreign Registration of Partnership – LP5) may provide limited liability for some partners. There must be at least one General Partner that acts as the controlling partner while the liability of limited partners is normally limited to the amount of control or participation they have engaged in. General partners of a limited partnership have unlimited personal liability for the partnerships debts and obligation.
A General Partnership (Statement of Partnership Authority – GP1) must have two or more persons engaged in a business for profit. Except as otherwise provided by law, all partners are liable jointly for all obligations of the partnership unless agreed by the claimant. Profits are taxed as personal income for the partners. Filing at the State level is optional.
Limited Liability Partnership
A Limited Liability Partnership (Registration of Limited Liability Partnership – LLP1) is a partnership that engages in the practice of public accountancy, the practice of law or the practice of architecture, or service related to accountancy and law. A Limited Liability Partnership is required to maintain certain levels of insurance as required by law.
A non-profit association by definition is an unincorporated association of natural persons for religious, scientific, social, literary, educational, recreational, benevolent or other purpose, not that of pecuniary profit. (Corporation Code Section 21000). The Black's Law Dictionary's definition of an association; "The act of a number of persons in uniting together for some specific purpose of business."
There are three categories of non-profit corporations based on the purpose for which their proceeds are intended. These categories are:
- Public Benefit (charitable and/or public benefit) – Under state law, public benefit corporations are corporations formed for a "public purpose" or "charitable purpose". Most groups forming public benefit corporations also want to qualify for Section 501(c)3 status. These groups usually organize for one of the specified purposes under Section 501(c)3 – charitable, scientific, literary or educational. All of these 501(c)3 purposes are considered "charitable" purposes under California Law. For example, a school or educational facility would organize as a California public benefit corporation formed under state law for “charitable” purposes but its 501(c)3 would be "educational". The public purpose classification under state law is for groups that want to form civic league or social welfare public benefit corporations.
- Mutual Benefit (organizations for the betterment and enjoyment of the members or benefits for specific small groups)
- Religious Benefit (churches, religious education, religious beneficial programs)
Proceeds of non-profit corporations are used for purposes other than personal gain.