Do you already have, or are you starting, a limited liability company (LLC) in California? Do you need an operating agreement or articles of organization? Do you understand the benefits, liabilities, and responsibilities of starting and operating an LLC?
Like a corporation, an LLC is a legal entity considered to be a "person" under California law and the laws of every other U.S. jurisdiction. As a legal person, an LLC has rights and obligations; it can own property and enter into contracts; and it can sue or be sued by another LLC or a corporation, by human beings, by the government, and by other legal persons. An LLC is (and, with some important exceptions, is usually legally treated as) separate from its owners (members or unit holders). This distinction means that doing business under the form of a Limited Liability Company has many different advantages, and possibly some disadvantages, depending on your circumstances. A Limited Liability Company is a good choice of entity for many businesses, though it may not be the best business entity type for all businesses. Each business has its unique circumstances, which may suggest one type of business entity over another. In either case, the goal is to choose the right entity type whose characteristics and laws best serve the needs of the owners.
If you are looking to form a business entity for a new business or startup venture, or for an existing business in Los Angeles or Ventura County, California, I can help you identify the most advantageous business structure for you, or help you transition from a sole proprietorship or another structure into a corporation. I can also help you change the state of formation ("re-domicile") of a Limited Liability Company, corporation, or other business entity.
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What is a Limited Liability Company (LLC)?
A limited liability company is a business structure that combines features of a partnership and corporation. Like a corporation, the owner's personal liability in an LLC is limited to the extent of their initial investment or contribution. However, its tax situation is often (but not always!) the same as a partnership.
LLCs can have an unlimited number of owners, called members. Member each own a percentage of the business that is often (but not always!) proportionate to their respective investments.
The specific regulations around forming and running an LLC vary between states.
Differences Between an LLC and a Corporation
While both limit the personal liability of their members (in the case of an LLC) and shareholders (in the case of a corporation), there are some key differences between the two structures.
Taxation Options
At the federal level (that is, as far as the IRS is concerned), corporations are separate tax entities, filing (and, depending on the nature of the corporation paying) taxes at the corporate level. LLCs, on the other hand, are "disregarded entities." That is to say, the IRS disregards their actual existence for tax purposes, unless the owners make an election to have the LLC treated differently. The owners of an LLC can elect for the LLC itself (but not for themselves) to pay (or not) federal tax; if not, the profits (and losses) are passed to owners, who then pay tax on profits attributed to them at the personal tax rate; and if losses of the LLC are imbued to the owners, then the owners can generally uses those losses to reduce their income tax they would otherwise have to pay from taxable income from other sources.
Governance Flexibility
Just like the internal affairs of a corporation are governed in part by the corporation's charter, its bylaws and (sometimes) a shareholders agreement or other similar agreements), LLCs use an "Operating Agreement" to set out how it will be governed, including management structure, restrictions on buying or selling ownership interests, profit sharing, dissolution and other important matters. LLC laws of California and most or all other states are quite flexible, and the Operating Agreement of an LLC can benefit from that flexibility, and be designed according to the members' preferences.
Level of Administration
Corporations must comply with more rigid government rules and regulations that LLCs do not have to follow. These rules and regulations involve stricter reporting and administrative requirements.
Advantages of an LLC in California
There are many advantages that flow from forming a business as an LLC. Below are descriptions of a few of them.
- LIMITED LIABILITY. One of the biggest advantages of an LLC is that it limits the liability of owners to their investment in the business. Owners can't be held personally liable for a company's debts and their personal assets are protected in the event an LLC can't pay a creditor, goes bankrupt, or is subject to a lawsuit.
- TAXATION. LLCs can be taxed as a sole proprietorship, partnership, or corporation. By default, an LLC is a pass-through entity. This means taxation is passed to the owners who pay taxes on the profits (or losses) via their personal tax return, avoiding double taxation. In some circumstances, an LLC can elect to be taxed as a corporation. This flexibility allows members to choose a taxation structure best suited to their situation.
- FLEXIBLE MANAGEMENT. When it comes to management, the members of an LLC can choose to either share management responsibilities or act like passive investors by nominating one or two managers to run the business (either members or non-members)
- FLEXIBLE CAPITALIZATION. Since LLC's are creatures of contract as permitted by each State's statutes, the flexibility available to the founders for capitalization is broad. The "sky" of the owners' imagination is the limit to an LLC's types of ownership interests which it can issue to founders, investors, vendors, and others.
- FEWER FORMALITIES. It's typically easier to set up and run an LLC than a corporation. There's less paperwork involved and, unlike a corporation, an LLC isn't required to hold board or shareholder meetings or appoint officers and directors.
Whether one of the above or another advantage benefits your business depends on the business itself and what your goals are. That's why speaking to a business attorney with experience forming LLC's in California can be critical to the success of your company..
Disadvantages of an LLC in California
Some disadvantages exist with any given business structure. Here are a few that you should be aware of if you intend to form an LLC in California.
- SET-UP COSTS. Forming an LLC often involves filing fees. It can be more expensive to set up an LLC than other business entities, like a sole proprietorship or partnership. Many states also charge LLCs annual fees and taxes.
- FORCED DISSOLUTION. In some states, an LLC must be dissolved when a member leaves, dies, or goes bankrupt. In comparison, a corporation can exist in perpetuity.
- TRANSFERRING OWNERSHIP. It can be more difficult to transfer the ownership of an LLC compared to a corporation or some other business entity.
- ATTRACTING INVESTORS. External investors often prefer investing in a corporation rather than an LLC. This preference is because an LLC is often viewed as a more complicated structure in terms of taxation and managing outside investment.
Do You Need a Business Lawyer for Forming an LLC in California?
There is no legal requirement to hire an attorney when forming an LLC, just as there is no legal requirement to pay a Medical Doctor to diagnose that weird feeling that you never felt before. In either case, its a good idea to speak to an experienced professional.
An experienced business attorney can assist you with determining: if an LLC is the right business form for you; whether forming in California makes more sense; what formation, organization, and investment structure best suits your business; and how other formation, organization, capitalization and other matters should be analyzed.
If your business is complex or involves especially risky transactions, a business lawyer can work proactively to avoid legal mistakes on your behalf. If a legal issue arises, they will walk you through the process, representing your interests throughout it.
Considering these factors with a corporate lawyer will help identify if a corporation is right for your business.
YOUR BUSINESS FORMATION RESOURCE IN LOS ANGELES AND VENTURA COUNTY
If you think you may need to form an LLC or a corporation or other business structure, do it properly. I would love the chance to get to know you and your business, for you to consider me a professional resource to help you form your business entity, structure your management and economic arrangements, and comply with applicable organization formalities, so that you can focus on growth and executing on your business strategies. Click here to make an appointment now for a Free Consultation..
This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read our Legal Notices.