Pros and Cons of LLC in California

Pros and cons of LLC in California respectively include members enjoying a cross between a corporation and a partnership, and paying franchise taxes.4 min read

Pros and cons of LLC in California respectively include members enjoying a cross between a corporation and a partnership, and paying franchise taxes. A limited liability company, also known as an LLC, is often described as a mixture of a corporation and a partnership. Wyoming was the first state to offer the LLC business structure 40 years ago.

Benefits of the LLC

Today, the LLC structure is growing faster than any other business type due to the simplicity, flexibility, liability protection, and tax advantages that the LLC structure offers business owners. An LLC is fashioned to offer flexibility and tax savings while providing limited liability protection. The formation of an LLC is somewhat complex compared to a general partnership.

The owners in an LLC are referred to as members. The members can vote to extend the duration of the organization if they choose. The organization's existence begins when the papers are filed. Corporations are defined as having limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interest. To be considered an LLC, the organization must not meet more than two of the four requirements.

The key advantage of an LLC is that members enjoy a cross between a corporation and a partnership. An LLC is provided the same limited personal liability protection as a corporation's shareholders. In the event of a lawsuit or other legal proceedings, the members' personal assets are protected from being collected for debts or other obligations. The individuals cannot be sued, with the exception of tort claims arising out of a member's actions.

As an LLC, members can choose to file as a partnership for a multi-member LLC, or as a sole proprietorship. This allows federal income taxes to pass through the LLC to its members and the LLC is not taxed.

Are There Tax Disadvantages to an LLC?

Depending on the state where an LLC was formed, there may be tax disadvantages, as well. For example, California requires LLCs to pay a franchise tax of at least $800. The tax is due within 75 days of formation and then every year thereafter. If the organization reports more than $250,000, the annual franchise tax increases. This results in double taxation considering members have to pay income taxes too.

Uncertainties in how LLC members will be required to meet corporate formalities is unclear at this time. LLCs are relatively new, thus a lack of state court opinion is unavailable on such matter. For example, to maintain limited liability protection, corporations are normally required to have annual meetings with a record of minutes kept.

Until there is case law addressing issues surrounding the legal concept, piercing the veil, it is unclear whether LLC members will be exposed to the same liabilities as those in corporations. Piercing the veil is the term used in legal proceedings that is a result of a judge's finding that the limited liability protection is no longer provided to its members.

An LLC operating under one owner is referred to as a single-member LLC. When the LLC has two or more owners, the company is considered a multiple-member LLC. Single-member LLCs have the option to be taxed as an S corporation, a C corporation, or a sole proprietorship. A multiple-member LLC has the same options as the single-member LLC, with the exception of a sole proprietorship. Instead, a multi member's third option is to be taxed as a partnership.

Limited liability is the key reason many people choose to operate as an LLC. It protects the member's assets in the event of a lawsuit or legal proceedings. In sole proprietorships and general partnerships, owners are at risk of losing their personal assets, such as home, cars, and bank accounts to pay business debts.

How to Form a Business in California

Here is a brief breakdown for forming an LLC in California

  • Name your LLC
  • Choose an agent of service or process
  • File the Articles of Organization
  • Initial Statement of Information
  • Create an operating agreement
  • Obtain an EIN

Things to Consider

If you choose to incorporate your business as an LLC, it is important to keep in mind that you may find it difficult to acquire business loans. A lot of lending institutions look at LLCs as being a risky investment. LLCs don't have near as much credibility as S-corps. If you are going to need to tap into business loans to get your company up and running, you may want to consider the advantage of incorporating as an S-corp.

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