LLCs As Business Entity Choices in California
California is a high risk, high reward state for businesses. The market is potentially very profitable, but the risk of being sued for something is also high. An LLC may be the answer to the risk factor.
To the surprise of many, the LLC has not been around for all that long. The first one was created in the late 1970s in Wyoming of all places.
California was extremely slow to do so, only allowing the entity in the early 90s. Once it became apparent the entity was very popular, the state government expanded its use.
So, what exactly is a limited liability company? It is a business entity thought up in a politician’s mind. The goal was to ease the burden on small businesses, and it does just that.
Liability should be a big concern for any business owner. If you use an LLC entity, however, you are protected from personal liability for any business debts. At the same time, you do not have to deal with the paperwork of a corporation.
Taxes are the next thing any business should focus on. Corporations can be difficult because they are double taxed. A LLC, however, is taxed like a partnership. The finances pass through to your personal return.
If you can choose to have a limited liability company taxed like a partnership, why not just use a partnership? The problem is liability. The partnership provides no protection. The limited liability company does, which makes it superior.
At this point, you might think the LLC is the obvious choice if you are going to start a business. It often is, but there are a few exceptions. Here are two that come to mind.
One way to make huge money with a business is to go public like Microsoft. An LLC, however, cannot be taken public. The ownership of the entity is held as member interest, not shares.
Taxes are a killer from both a personal and business point of view. Certain LLCs can lose the benefit of being taxed as a partnership. A single owner LLC is taxed like a sole proprietor by the IRS, canceling out any tax benefits.
Another danger with the LLC is the lack of formality. This can be a good thing, but it can also lead to laziness and sloppiness by owners. You must practice good business administration to avoid this problem.
All and all, the LLC is a very good choice for many smaller businesses. In a state like California, you get the liability protection of a corporation with the tax ease of a partnership.
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