The limited liability company (LLC) was first authorized in California in 1996 and thus is the newest form of business entity you may choose. Since inception, it has rapidly become a popular choice for business organization. Simply stated the LLC is a hybrid of the corporation and a partnership. It combines the benefits of limited liability offered by the corporation and the pass through taxation of a partnership.
Important elements of the LLC are:
- Formation – The LLC is formed by filing the appropriate documentation with the state. Before or immediately after filing the owners must sign a detailed operating agreement that in part provides for the rights, duties and obligations of the owners.
- Ownership – The LLC is owned by the members who can hold equal or unequal ownership interests.
- Management – When deciding on management you have a variety of options that can be put in the operating agreement. Management may be conducted by the members known as a member-managed LLC or by a manager which is known as a manager-managed LLC.
- Personal Liability – Generally, members of the LLC are not personally liable for the debts and obligations of the LLC. This protection can be lost however if the member guarantees a debt, takes an improper distribution or engages in tortious conduct.
- Taxation – Unless the LLC elects to be taxed as a corporation the LLC is not subject to federal income tax. Instead, the profits are “passed through” to the members and taxed as a partnership unless you are the only member of an LLC in which case the IRS will treat you as a disregarded entity for income tax purposes. The income taxes are paid on the members individual returns. The LLC must pay the state minimum franchise fee (currently $800.00) and a scaled additional fee if gross revenue exceeds $250,000.00.
- Business Purpose – An LLC may generally engage in any business activity except the banking, insurance and trust business. Furthermore, if your business or occupation requires a license under the Business and Professions Code then you will not be eligible to organize as an LLC.
The LLC has numerous non tax advantages over an S corporation. One of the main highlights is a great degree of flexibility in structuring the management and profit distributions that can be inflexible when using an S corporation. Unlike a corporation that is subject strict requirements for the holding of formal meetings, the keeping of minutes and recording resolutions, an LLC can be more informally managed as the members agree without the risk of losing the limited liability protection.
Prior to selecting the best option for your business careful consideration of your business plan, financial projections and other relevant details should take place with aqualified attorney.