California business structures: Understanding LLCs

When starting up a new company, it is important for business owners to determine if structuring as an LLC is the right option for their needs.

The U.S. Small Business Administration reports there are 3,622,304 small business in the state of California. Some of these operate locally, while others conduct business both in and out of state. When they are starting up, owners must decide whether to structure their businesses as limited liability companies, or LLCs. In order to determine if this is the right entity type for their enterprises, it is important for people to understand the basics of LLCs.

An LLC is a business structure that combines elements of corporations and partnerships. Such entities may be owned by one or more people, who are known as members. LLCs offer business owners some operational flexibility and liability protection that other structure types do not.

Formation requirements

Compared to other business entity types, LLCs are relatively simple to form. Generally, the first step for business owners is to choose a name for their company and make certain it is available. Then, they must file their articles of organization with the California Secretary of State and pay a $70 fee. The final step is typically creating a verbal or written operating agreement and getting any necessary permits and licenses.

Tax responsibilities

For state and federal purposes, LLCs are not considered stand-alone entities. The members may elect to consider the business as a disregarded entity, a partnership or a corporation. When an LLC is considered a disregarded entity or partnership, each member pays a distributive share of the company's income taxes through his or her personal taxes.

Life of the company

LLCs may be perpetual or the members may set a termination event or date when the companies are formed. It is important to keep in mind, however, that the business may be dissolved when a member leaves, unless the operating agreement specifies otherwise. When an LLC is dissolved under such circumstances, the remaining members may form a new company or move on.

Profits and losses

A key advantage of LLCs is they allow members to share the company's profits with fewer restrictions. It is up to the members to decide how to split the revenues. Often, their shares are determined based on factors such as their individual contributions to the business. In addition to sharing the profits from the company, however, the members also share its losses.

Recordkeeping requirements

In addition to their ease of set up, LLCs generally require less paperwork to continue operating than other business structures. For example, business owners may be required to take meeting minutes and hold annual meetings in order to operate their companies as corporations. LLC members do not have to meet these requirements to do business and maintain their liability protection.

Consulting with an attorney

Choosing a business formation type is an important step for owners in California, and elsewhere. Deciding which option is right for their needs and navigating the legalities involved with setting up their companies may be challenging, however. Thus, it may benefit those who are starting up businesses to work with a legal representative. A lawyer may help them avoid some of the common pitfalls and position their businesses for success.