Choosing a legal entity for a new California construction business

One of the most important decisions a new construction firm makes is what legal entity will be chosen in which to carry out the business.

As the economy continues to improve, more people may choose to enter the construction business throughout California. While a construction professional may be eager to take advantage of opportunities for building and renovation projects, it is important to slow down long enough to bring on board a business attorney with specific familiarity with the construction industry.

Choice of legal entity

One of the first business decisions that must be made is what kind of legal entity should be established for the business. This choice must be very carefully made as it will directly impact the bottom lines of the business and the individuals involved.

Legal counsel can help evaluate the goals and nature of the particular business to help clarify the factors that will influence the choice of entity. Such factors can include:

  • Whether the plan is to take on one specific construction project or to establish a long-term business
  • How many people will be involved
  • How financially risky the projects are likely to be
  • Sources of operating capital
  • Ability and desire of the individuals involved to personally absorb financial risk, including exposure of personal assets to business debt, lawsuit settlements and judgments, and tax liability
  • Level of management control desired
  • Issues raised by the particular type of construction anticipated and whether the submarket trends toward relative stability or toward high risk
  • Tax implications
  • And more

Legal entity types

With the answers to these questions in mind, the construction entrepreneur and his or her business lawyer can look at the types of legal entities available under California law, which include:

  • Sole proprietorship in which one person sets up shop as an individual without creating any separate legal entity for the business; the owner is personally liable for all debts of the business and handles business taxes on his or her personal returns
  • General partnership in which two or more people go into business together, usually sharing profits and liabilities equally (although each partner may be legally liable for more than just their respective share of partnership debt)
  • Limited partnership in which some partners (limited partners) are limited in exposure to liability to the amount of their respective investments
  • Corporation that shields owners and directors from personal liability, and is separately taxed
  • Limited liability company with aspects of partnership and some of a corporation, that shields member-owners from some liability
  • Joint venture in which two or more people undertake one project, similar to a partnership
  • And more

Legal counsel involvement

Once the choice of legal entity for the new construction company has been made, legal counsel can assist with state and local government filings to create the entity and do business, license applications, federal and state tax authority filings, contract negotiation and drafting, and more.

From their offices in San Mateo, the construction law attorneys at Last & Faoro represent construction clients of all sizes and types in the San Francisco Bay Area, across Northern California and throughout the entire state.

Keywords: construction, firm, business, legal entity, California, risk, liability, debt, control, tax, sole proprietorship, partnership, corporation, limited liability company, joint venture