28th Feb 2013
Of the business types one can form in California, a very popular choice is the limited liability company, or an “LLC.” Business owners like the LLC because it combines the best features of a partnership or sole proprietorship and a corporation. In an LLC, the business income is reported as the owners’ personal income. This is what happens in a partnership or sole proprietorship. An LLC is not a distinct taxable unit – unlike a corporation.
But like a corporation, LLCs have a feature known as “limited liability.” This means that LLC owners are shielded from personal liability for their financial obligations. Thus, if an LLC business owner has debts or faces litigation, he need not worry that his personal assets – house, car, heirlooms, etc. – may be at risk. Only the LLC business itself is at risk.
So, is an LLC the business form for you? In California, you may want to consult your estate planning attorney as you embark on your start-up. If you are concerned about your personal exposure to litigation, or financial obligation from your business operations, then an LLC may be for you. For example, you may want to start a small transportation business. Such a business may run the risk of suits arising from complaints of poor service or from accidents arising from business operations. As an LLC owner, you need not worry about the possibility of losing your house or car due to multiple lawsuits. LLCs are also less formal and structured than corporations.
Still, in California it is always good to consult an attorney knowledgeable in business and estate planning when deciding on the form of your business. California law restricts certain businesses as to what form of business they can be. If you plan to operate a bank, an investment house, a mutual fund company or an insurance company, you have no choice but to form a corporation. On the other hand, if you plan to offer a service such as an architect firm, accounting firms, law offices, doctor and/or dental clinics, you cannot form an LLC. These can only be limited liability partnerships or LLPs or a professional corporation.
As you start up your business, you will notice that you will have to pay a lot of fees to the state government. If your business income is still small, you may just want to form a sole proprietorship or partnership. In California, whether your business is an LLC or a corporation, you have to pay $800 yearly to the Franchise Tax Board. That may be an expense you may not be able to afford in the early going. If you run a single proprietorship or a partnership, you may want to buy commercial liability insurance, which may be often be sufficient to cover your assets in case of a lawsuit against your business.
As with estate planning, your choice of business form will result in increased or decreased taxes, personal liability and fees to the state government. Seek the help of an attorney in estate planning in California to help you in deciding your form of business.