A Limited Liability Company, or "LLC", is an unincorporated business entity that is similar to both corporations and partnerships.
Like a corporation, the formation of an LLC shields its members from personal liability for the debts and obligations of the company.
An LLC is typically formed by the filing of a "Articles of Organization" or similar certificate with the Secretary of State. Like a partnership, the members of LLCs typically enter into an operating agreement that establishes how the LLC is governed.
Many of the provisions of an LLC operating agreement are similar to those contained in partnership agreements. For example, the operating agreement usually contains a "buy-sell" agreement governing how and to whom shares in the LLC may be transferred.
LLCs may have an unlimited number of owners and there are no restrictions on the type of persons who may be owners. Additionally, an LLC may have more than one class of equity interest, as well as wholly owned subsidiaries whose assets, liabilities, and operating results will be treated independently from those of its LLC parent.
One advantage of an LLC over a corporation is that there is more flexibility in management. For example, an LLC may be managed in the following ways:
Solely by its members
By its members and a management committee serving in a function similar to the board of directors of a corporation
By its members, a management committee, and officers
Further, an LLC, unlike an S corporation, may provide for allocations of profits, losses, and distributions disproportionate to the percentage of equity interest held in the LLC.
Because an LLC combines the insulation from personal liability of a corporation with the tax advantages and managerial flexibility of a partnership, it will, in most cases, be the entity of choice for new businesses. Moreover, using the LLC form of conducting business will not be an impediment to raising capital in offerings of the company's securities because of the protection against liability afforded to equity holders and the ability to provide for free transferability of equity interests. Many states now permit professionals to operate their practices through LLCs, but in such instances a professional may have personal liability not only for their own negligence or misconduct, but also for the negligence or misconduct of other professionals under their direct supervision.
Tax Treatment of Limited Liability Companies
Unless it elects to be taxed as a corporation, the tax treatment of an LLC is the same as that of a partnership or sole proprietorship. That is, the profits and losses are passed through to the members of the LLC and there is no tax "at the entity level".
California law imposes taxes and fees on LLCs at the entity level. LLCs organized in California, foreign LLCs qualified to do business in California, and foreign LLCs whether or not qualified but that conduct intrastate business in California are subject to:
An annual franchise tax of $800 for the privilege of doing business in California; and
An income tax for any year in which the LLC's total income (similar to gross income) derived from or attributable to California is $250,000 or more. The amount of the statutory fee is:
If you would like more information regarding whether an LLC is the right choice of business entity for you, please contact the Law Offices of Afshin A. Asher, Inc.