Legal

What Is An LLC?

Legal

When deciding how to structure your business, there are important considerations to make including how you’d like your business to be protected, organized, managed, and taxed.

News: A Sole Proprietorship or a general partnership is not a business entity. To have an actual business you can sell and lives separate from you, you need to form an entity. Most of the time, the simplest form of a business entity is an LLC. So what is it?

What is an LLC?

An LLC, or limited liability company, is one type of entity you may select. Choosing to structure your business as an LLC allows for relatively simple formation, flexible ownership and management, and different tax options. In fact, if you are a single member LLC it can be very cost effective and low maintenance. Even if you are multimember, it is still more affordable than most other entities.

Why Form an LLC?

As the name suggests, an LLC provides limited liability to those who own the business. This is a greater protection than a business that is set up as a general partnership or a transitional “DBA”. Typically, the owners of the limited liability company, called members, cannot be held personally liable or responsible for debts and liabilities of the company. Each member’s personal assets are generally protected in the event of litigation. Like everything, there are exceptions to this rule. But generally, you are protected.

How to Form an LLC

Forming an LLC is fairly easy—the business must file a document titled Articles of Organization with the Secretary of State in the state which the LLC would like to be formed in. An LLC may be formed by one or more individuals.

In California, the filing fee for Articles of Organization is $70. The Articles of Organization must include:

  • The business name In California, LLCs must include “LLC,” “limited liability company,” or “L.L.C” in the name of the company.
  • A purpose statement This may be “for any lawful business purpose”, whether or not it is for profit.
  • An agent for Service of Process This is the person who will be served in the event of a lawsuit.
  • Who will manage LLCs can be managed by the owner of the business or they can designate a manager to manage the business.
  • An address for the LLC.

LLC Management

LLCs may be managed by the owner (or owners) of the business. Members may be individuals; other business entities including partnerships, corporations, other LLCs; or trusts. Members may choose to manage the LLC themselves or distinguish managers to manage the LLC.

LLCs are governed by their operating agreements; this document establishes the purpose of the LLC, how the LLC will be managed and operate, and what rights members have. The operating agreement is an internal document and does not need be filed with the Secretary of State. Operating agreements lay the foundation and scope for the members, minimizing confusion among members.

How are LLCs Taxed?

LLCs have the option of pass-through income taxation rather than being taxed as a corporation. If an LLC elects pass-through taxation, the business entity files taxes as a partnership and each member files IRS form 1065, reporting their share of income.

Fun Fact: You actually elect to be taxed as an “S-Corp” as an LLC. ie: you get the flexibility and simplicity of an LLC but you get the tax benefits – if it makes sense for you – of an S Corp. Keep in mind, it does not make sense for everyone and you should check with you EA or CPA.

LLCs that are registered in California generally pay a minimum annual tax of $800 to the California Franchise Tax Board. While this might seem high, there are ways of off-setting this cost with the correct tax planning.

LLCs are well-suited for businesses with one or more members who would like to easily form their business and protect themselves from personal liability. Additionally, LLCs are great for flexible ownership and management structures. If you need more help forming your business, Slate Law Group is happy to help.

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