Limited Liability Companies
Limited Liability Companies
Are you thinking of forming a limited liability company (LLC) for your business or real estate? Most entrepreneurs, business owners, and real estate investors will at some point research which entity is right for their enterprise. There are several options for forming your entity such as a general partnership, limited partnership, a corporation, an LLC, or a sole-proprietorship. Although the best choice of entity depends on many factors, California LLC’s are a popular choice for many business owners and real estate investors. As its name implies, an LLC limits the legal liability of its members (owners). While the same protections exist for corporations, an LLC generally is easier to form and has less corporate formalities involved in its management. Real Estate Law Corporation has experienced LLC formation attorneys that can help forming your new LLC entity.
What is an LLC?
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An LLC is a type of business entity that can have one or more owners, referred to as “members.” LLC members generally 00 participate equally in the management of the business unless they elect an alternative management structure called “manager managed.” An LLC combines the best features of a corporation with that of a partnership. An LLC enjoys the same limited liability benefits of a corporation with the ease and tax advantages of a partnership. California laws provides for single member and multi-member LLC’s. Like all other legal entities, an LLC must open its own bank account where all income and expenses flow through and all LLC business should be conducted in the name of the LLC.
LLC vs. Corporation
Both corporations and LLCs provide their owners with liability protection. However, LLCs are ordinarily taxed like sole proprietorships or partnerships. Further, LLC owners do not work as employees of the LLC and rather they are self-employed business owners. On the other hand, corporate shareholders who work for the corporation must be treated like employees of the corporation, which subjects them to payroll taxes and deductions.
For tax purposes, corporations can be designated as a C corporations or S corporation. C corporations are taxed at the corporate level, and then the shareholders are also taxed on their share of income from the corporation, which is known as double taxation. On the other hand, S corporations are pass-through entities—profits pass through the business and are taxed at the shareholders’ individual rates, therefore not subject to “double-taxation.”
Benefits of an LLC
Limits Personal Liability
An LLC provides its owner or owners with limited liability. This means that means the LLC members (owners) are generally not personally liable for any debts incurred by the LLC or most LLC-related lawsuits. As a result, creditors or people that file lawsuits against the LLC are not able to go after the personal assets of the LLC’s members or other entities owner by the LLC members. Therefore, the member’s liability is limited to the amount of the member’s investment in the LLC.
An LLC benefits its owners with pass-through taxation. This means that the profits (or losses) the business incurs “pass through” the business to the owner’s personal tax return.
Ease of Formation and Operation
An LLC is one of the simplest business entities to form and operate. Unlike a corporation, an LLC does not require that the LLC have officers and directors, board or shareholder meetings, or the other administrative burdens that come with having a corporation.
An LLC offers a lot of flexibility with respect to ownership. For example, there are no minimum or maximum limits on the number of members that an LLC can have. On the other hand, an S Corporation cannot have more than 100 shareholders.
LLC’s are usually taxed as sole proprietorships or partnerships but LLC’s have the option of choosing to be taxed like a C Corporation or S Corporation. This is can be accomplished by filing a taxation election with the IRS. LLCs can choose to be taxed as a C corporation or an S corporation.
Disadvantages of an LLC
Generally, it costs more to form and operate an LLC than to be a sole proprietor or have a partnership. There is a filing fee for forming the LLC and annual fees. The minimum annual LLC fee is $800.00 per year but for LLC’s that pass a certain amount in gross revenue there is an additional “gross receipts tax” that must be paid each year. Further, although not legally required, it is highly recommended that you have an experienced business lawyer draft a comprehensive and well written LLC operating agreement that specifies how the entity will be governed.
Outside Investor Limitations
If you have a large business and are seeking outside investors for your business, LLCs are not the most ideal entity structure. For example, venture capital companies will generally only fund corporations. Corporations work best for outside investments as stock can be issued in exchange for investors’ money. Although outside investors can invest in LLCs and receive LLC ownership interests, but this can be more complicated than with a corporation.
Limited Liability Company (LLC) Formation Attorney
If you need legal assistance with forming a California limited liability company (LLC), Real Estate Law Corporation has highly experienced entity formation attorneys that serve business owners and real estate investors in the greater Sacramento area and all over California.