There are several business forms that protect business owners from responsibility for the business’ obligations. Corporations and limited partnerships are commonly formed to limit the owners’ personal liability. However, the Limited Liability Company, commonly known as an LLC, is gaining ground on these forms as it offers greater structure and operating flexibility.
LLC formation and operation are governed by the California Corporations Code. An individual or several persons or businesses may form an LLC. The LLC’s owners are referred to as members, and the LLC is a legal entity separate and distinct from its members. An LLC is formed by filing articles of organization with the Secretary of State and paying the filing fee. LLCs must pay an annual tax for the privilege of doing business as an LLC.
The members enter into an operating agreement that delineates the rights, obligations and duties of each of the members. The members may elect to conduct the day-to-day business of the LLC in which case they are referred to as managing members. The members may also elect to hire a non-member to manage the business.
An LLC may elect to be treated as a partnership or a corporation for income tax purposes. If the LLC elects to be treated as a partnership, business income, losses and deductions pass through to the LLC’s members. The members then report the income and losses on their personal tax returns.
The major non-tax benefits of an LLC are limited liability for its owners and freedom to structure management rights and financial interests as the members desire. There are fewer restrictions on the member structure of an LLC than for a corporation. An LLC may have different classes of ownership and income, and losses need not be allocated to members according to their percentage of ownership. This differs from a corporation where income and losses are allocated according to the percentage of stock owned by the owners/sharholders. Also, LLC members may include individuals, partnerships, limited partnerships, trusts, estates, corporations and other LLCs, in contrast to an S Corporation which limits ownership to individuals, estates and certain types of trusts.
The laws governing LLCs do not require LLC members to comply with statutory organization formalities in order for the members to remain immune from personal liability for the LLCs debts and obligations.
Consult with your accountant and attorney to determnine if an LLC is the right form for your business. For further information call Joyce Helock at 661-414-7123.