What is a California LLC, or Limited Liability Company?
California LLCs are ideal for small to medium-sized businesses which desire flexibility. Limited liability companies boast advantages in addition to pass-through taxation and flexible ownership and management.
Advantages of Establishing a California LLC
Some of these advantages can be unique to each business, and exist because of variations in LLC types. For example, a Series LLC can divide its assets into multiple series, denoting each as its own LLC. For example, Real Estate limited liability companies can establish each property as a separate California LLC. If a property is structured as its own LLC, liability incurred by that property cannot jeopardize the personal assets of the owner or the other properties owned by that person.
A California LLC can also be beneficial if you expect your business to take some time to begin generating profits. If you expect to lose money on your business for the first several years, an LLC can be ideal, since you can pass losses through to yourself and other members, diffusing individual income tax. It can also be easier to share profits between members of a California LLC than it is within other business models. Talk to your California incorporation lawyer about how you can benefit from a California LLC tailored to meet your unique business needs.
A California LLC requires significantly less paperwork on the administrative end, as well as simpler record keeping, when compared to a California corporation. Accounting can also be simpler and more flexible, since California LLCs are not required to use the accrual taxation method, detailed in the California Corporation Accounting section.Your incorporation lawyer can help you set up a California limited liability company that is simple to run and maintain.
A California LLC is also less easily acquired in a hostile manner than a corporation. Investors can buy the majority of shares in a California corporation and then control the company. In a C – corporation, whoever owns the most shares can make important business decisions. However, the managing partner and operating agreement of an LLC can prevent this problem, stopping outsiders from gaining significant control over your California limited liability company.
To learn about advantages shared by both the California LLC and S – corporation, see the Similarities: California LLC and S – Corporation section.
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Disadvantages of Establishing a California LLC
Despite its many advantages, setbacks can still accompany a California LLC structure.
Since the limited liability company model is not as well understood by many investors as the California corporation, it may be more difficult to generate capital for an LLC by attracting investment.
For example, a California LLC might appear to be a riskier investment than a California corporation, since, unlike corporations, LLCs are not required to have officers or a board of directors. The presence of a familiar operating structure and other formalities may make some investors feel more comfortable and secure making an investment in a corporation than a California LLC.
While flexible management and operation of California LLCs can be advantageous, this can also cause confusion due to the resulting lack of consistency amongst limited liability companies. For example, individuals who control a California LLC are often referred to by many different titles, such as partners, members, chief executive officers, presidents, managing members, managing directors, and more. Since each individual LLC determines the roles of influential parties within its unique operating agreement, the amount of power an individual with a given title possesses can differ. Therefore, legal confusion can arise based on who has the power to conduct important business on behalf of the California LLC, such as signing contracts and making significant decisions and changes.
Although a California LLC has a seemingly ideal tax structure, negative aspects of the taxation of limited liability companies can also arise. California, among other states, requires LLCs to pay an annual franchise tax of at least $800. Paying this tax is like paying the state a fee to enjoy the benefits of a limited liability structure. (California corporations must pay an annual franchise tax as well, which also begins at $800.) A California LLC may also be subject to renewal fees to maintain limited liability status each year.
Keep in mind that foreign LLCs must adhere to different regulations than California LLCs, of which your incorporation lawyer can advise you.
In some circumstances, as discussed in the section California LLC Tax Options, it is possible for a California LLC to be taxed as a corporation, losing its ability to enjoy pass-through tax benefits. For example, if a California LLC does business outside the US, or if a member of the LLC is a resident outside the US, an LLC may be subject to taxation as if it were a corporation, regardless of member preferences.
Another potential disadvantage of starting a California LCC is the inability to create a bank or a company offering insurance, since these services cannot be provided by LLCs.
A California LLC also cannot offer professional services, or services which require licenses, such as medical, legal, accounting, and other services. Although these professionals are not protected from malpractice by the LLC structure of their business, a PLLC can still be appealing. Unfortunately, this form of LCC is not permissible in California, which is something you should consider when selecting a business structure based on the unique goods and services your company will offer.
If you plan to start a business that will grow and gain many new owners in the future, a corporation may be a better choice, since it is typically more difficult to transfer and share ownership of an LLC. Entrepreneurs who plan to go public with their business are also more likely to opt for a California corporation than an LLC.
Unlike a corporation, which exists perpetually after undergoing California incorporation, you must define when and why a California LLC will cease to exist upon creating the business. With the help of your California incorporation lawyer, you can establish perpetual existence for your LLC, but this is not the default status. You may also vote to extend the duration of the LLC at any time. Work with an experienced incorporation lawyer to avoid errors when establishing the longevity of your California LLC.