OVERVIEW OF LIMITED LIABILITY COMPANIES
LLC is the abbreviation for a “limited liability company”, not a “limited liability corporation” as it is sometimes mistakenly called. The main reasons LLCs have become the go-to choice of entrepreneurs starting a business in California are (1) limited liability for owners, (2) flexible management options, (3) flexible income taxation options, and (4) ease of setting up.
(1) LIMITED LIABILITY
Business owners forming an LLC in California are shielded from personal liability for obligations of the business once the LLC is set up. This means, for example, that if your LLC lost a breach of contract lawsuit with a vendor it does business with, only the LLC’s assets could be used to pay damages, not a house or car owned in your name. While LLCs can be a natural choice for partners in partnerships wishing to limit their liability, sole proprietors can even enjoy this benefit by forming single-member LLCs.
The limited liability after starting an LLC in California is not absolute. To maintain limited liability status, you must keep your personal assets separate from those belonging to the LLC, in addition to making all required filings with the state. Failure to separate assets results in “commingling”, which can help creditors or plaintiffs in lawsuits against the LLC “pierce the veil” of limited liability and go after the owner’s personal assets based on a theory that the LLC is merely the “alter ego” of its owner. The firm counsels its clients before and after forming an LLC in California on how to avoid commingling and other actions that can result in loss of limited liability status.
(2) FLEXIBLE MANAGEMENT OPTIONS
If you start an LLC in California, you also have flexible management options for running your business. Unlike corporations, which require a three-level organizational structure consisting of shareholders, a board of directors, and corporate officers, LLCs can be managed with much less formality. For example, LLCs in California are not required to hold annual meetings or issue certificates of ownership (although they may, and sometimes it is advisable to).
The owners are called members, and LLCs can be member-managed (all members are involved in managing) or manager-managed (some members are managers and others are passive members). A document called the operating agreement determines the management structure as well as many other important issues facing an LLC. These critical documents include a single member LLC operating agreement, which may encompass the basic terms related to running a business as a single-member LLC, and complex multiple-member agreements with buy-sell, non-competition, and securities provisions. During your 30-minute consultation the firm will address the choices available for the terms of your operating agreement and then craft a customized solution after a review of answers to your initial online intake questionnaire and the consultation.
(3) FLEXIBLE INCOME TAXATION OPTIONS
Owners can also choose how their LLC is treated for income tax purposes. The most common choice for those starting an LLC in California is to elect for “pass-through” tax liability in which the LLC is treated like a partnership, and the income, gains, losses, deductions, and credits of the LLC pass through to its members for reporting on their personal income tax returns. Other business owners with more complex management structures may elect to have their LLCs taxed as corporations.
Regarding taxes, it must be noted that California LLCs must pay the California Franchise Tax Board a minimum annual tax of $800 plus applicable fees on earnings.
(4) EASE OF SETTING UP AN LLC IN CALIFORNIA
Starting an LLC in California is easy. The authority to form an LLC in California comes from the California Revised Uniform Limited Liability Company Act, and involves filing “articles of organization” with the California Secretary of State on Form LLC-1. Within 90 days following the date your LLC is registered with the state, a “Statement of Information” form must also be filed.
At a minimum, a search of the California Secretary of State’s records should be performed before deciding on your LLC’s name (and definitely before purchasing business cards, advertisements, or signage). If your proposed name does not show up in the Secretary of State’s business records, a “name reservation” form should be filed before the LLC-1 to ensure that the name is available when you want to form your LLC.
However, you do not necessarily “own” the name of your LLC even if it has not been used by another California business registered with the state. Another business may be using the same name as yours in another state or even in California, in which case that business could possibly stop you from using your proposed business name by filing a trademark infringement action. Issues regarding business names involve trademark rights, which is another area the firm specializes in. If you are uncertain whether your business name is being used by another company, discuss this issue during your 30-minute consultation, and the firm will help you decide if a trademark clearance and trademark registration is right for your business.
If you want to start an LLC, the firm will take care of all of the steps involved so you can focus on getting your business off the ground.
